Friday, June 25, 2010

Let's not forget the dead

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Before I get into the meat of this posting, I want to share a few brief stock market comments.

As you know from prior posts, like Summer Rally Trying to Begin, which came out right at the low (better to be lucky than good!), I have been generally positive on the intermediate-term prospects for stocks into the summer. And while I still have that lean, our investment models quickly raised cautionary flags last week, leading me to do a lot of head scratching.

After 22 years in the business, I’ve learned that it’s much better to miss part of a rally than lose money and remain exposed. So we heeded our models’ warnings and significantly raised cash in excess of 50% around Dow 10,400 and S&P 1116. The market certainly does not have the “feel” of imminent collapse and frankly, I don’t think we will see much more than a routine 3-6% pullback from the highs before we launch another leg higher next month. Nonetheless, I have to temper my overall enthusiasm temporarily as we wait for the dust to settle.

As a side note, as I write this on Wednesday, the Federal Reserve is scheduled to release their announcement that rates will remain at essentially zero for the foreseeable future as the economy tries to get off the mat and stabilize. But I doubt Bernanke & Co. will say much more and certainly nothing very positive.

Since the bull market began, almost every Fed day has been a positive one. If today is not, that is a definite negative change in market character. Additionally, because of the recent heavy selling, the stock market is “supposed” to bounce into the weekend. If that doesn’t happen, it will be another indication that we are seeing a change.

This week’s contribution doesn’t really have an investment theme, per se, but it’s such a hot topic that I can’t ignore. I've been uncharacteristically quiet about the BP disaster for too long, waiting for some positive turn to occur. It's enough waiting. First, as I am sure everyone agrees, this is the worst environmental catastrophe in history. It's so bad that no one even knows how bad it is. First it was 5,000 barrels a day spewing out. Then 10,000. And 50,000. Now it’s 100,000 or possibly higher. But as oil continues to spew and the endless daily reminder on television along with the count of what day it is in the crisis, it seems to be almost totally forgotten that 11 hardworking Americans perished in the Deepwater Horizon explosion.

It's a horrible, awful thing that such widespread destruction is being done to wildlife, our shores and local industry, but let's not forget that 11 men are dead after going to work like many of us do on a regular basis, through no fault of their own. Presumably, 11 wives no longer have husbands and 11 families no longer have a dad. As bad and as terrible as the spill is, there is also a hefty loss of human life.

In their race to report, the media regularly throws out statements as facts, even though they have no basis. It's beyond irresponsible, but what are the consequences? None! In my channel surfing of Sunday morning political shows last weekend, one US News & World Report columnist stated that the two relief wells being drilled right now as a fix were far from a sure thing and "a game of inches", implying that an inch or two in either direction would doom the project. According to almost every expert I've heard and read, that's simply not true.

The reporter's statement was alarming and unnerving to viewers. On a separate topic during the McLaughlin Group, a known left leaning journalist had no problem labeling California republican gubernatorial candidate, and former EBay CEO Meg Whitman, as a social conservative, something that could not be farther from the truth. Immediately, the journalist was taken to task and forced to rescind her remark.

In the 24/7, speed of light, news flow, it seems that many in the media have taken the path of speak now and worry about the truth later. And we, the public, just continue to accept it. Getting back to the BP calamity, first, President Obama was praised for staying out of it to let BP deal with their man-made disaster. But then, he was harshly criticized for not doing enough or anything. At the same time, according to Gallup, his approval rating sank to a new low of 44%.

How similar is this to George W. Bush's handling of Katrina? Were they both slower to respond? Sure, but there's a fine line between adequate response time and the government playing a dominant role in every single crisis. Under Bush, FEMA was lambasted for not getting on top of the crisis the day after the hurricane blew out. With Obama, MMS is now one of the scapegoats that approved BP's drilling plan.

Whether it's a natural or man-made disaster, the government is almost always set up to fail with the exception of maybe 9-11. Do you respond too soon and risk making a potential mountain out of molehill? Or are you too late and come across as lax and out of touch?

Far be it for me to defend Barack Obama. Lord knows, I disagree with almost every single fiscal and economic policy and proposal he's made. But give the guy a break. We're in unchartered waters here. Pardon the pun. Should booms have been shipped down from Maine? Of course. Should we have allowed our European allies to send ships to help and suspend the Jones Act? In hindsight, you bet! But frankly, no leader EVER gets it 100% right. It’s just not possible and we are crazy to hold them to that standard.

I do think Obama did himself a disservice by making that speech last week from the Oval Office. I listened with the assumption I would not like the plans I heard. But instead, I came away much like left leaning MSNBC and right leaning FOX. There was no "meat" in the speech. No "how to". Just a lot of nothing really.

I watched the Congressional grilling of BP CEO Tony Hayward the other day, by both parties, and couldn't help but chuckle when they asked inane, rhetorical questions about the incident. They acted as if BP knew for sure what they were doing would cause such a disaster and did it anyway, to the point of almost bankrupting the company.

Does that mean we can grill Congress for forcing Fannie Mae and Freddie Mac to loosen lending standards over the past 25 years? Can we take Congress to task for predatory lending? Or allowing five investment banks to lever up 40 to 1? Or getting private deals from unscrupulous lenders like Countrywide?

One New York Congressman fired at Tony Hayward, "You're really insulting our intelligence"! Don't you need to first have intelligence before it can be insulted???

On a final note as I mentioned during a CNBC interview the other day, I was trying to figure out if there were any winners in the whole BP disaster. The only one that came to mind in a very perverse way was Goldman Sachs. Before BP, Goldman and Lloyd Blankfein were front and center, caught right in the crosshairs of Congress, Barack Obama and the general public. Since early May, you haven’t heard or seen much of anything in the media as Goldman and the SEC seem to be privately working on a settlement agreement. It really is amazing how quickly we turn or are turned from one hot topic to another…

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

Thursday, June 24, 2010

Financial tips for college graduates (and their proud parents)

As millions of graduates are beginning life on their own, earning
their own salary and paying their own bills, they find the transition is not necessarily easy.

Some leave college already weighed down by debt.

According to the College Board's Trends in Student Aid study of 2007-2008, the median debt for all bachelor's degree recipients was $11,000. Of the two-thirds of students who actually borrowed money, the median debt was $20,000. The average starting salary for a new graduate is $30,000.

Bill Hardekopf, chief executive officer of and author of The Credit Card Guidebook, says this is the perfect time for graduates to "face reality and develop a budget" or financial pressures will only worsen.

"It can take a lifetime to pay down debts incurred in college. The good news is this the best time of your life to set good savings and spending habits. For most graduates, this can be a time when they can live cheaply and flexibly and develop a stable financial footing," he said.

Here are some tips from Bill on how you can get off to a good financial start. Read through them and leave us your tips below:

1. Budget everything and put every dollar in place.
Start with your net income, not the salary number they give in the job offer.
What is your income after taxes, health care, and retirement are taken out? This is the amount of money that you have to work with each month.

Expenses always seem to cost more than you estimate and this underestimating can be a budget buster.
Ask questions. How much will utilities and health care really cost? Track your spending for a month to get an accurate understanding of where your money goes. This can help you plug the leaks where your money is slipping away.

2. Start saving immediately from every paycheck, even if it is only a small amount.
There will always be a good reason to put off saving, but saving is a habit, and the sooner you start the better off you will be. Open a retirement account at work or your own IRA. Time and compounding interest will help your small amount grow into significant savings by retirement.

"If you have been a starving college student living on a tight budget, continue to keep a tight lid on expenses. Even if you are start with a good salary, put as much as you can in savings," Hardekopf said.

Open a separate savings account to build up an emergency fund. The goal should be three months' income. If you lose your job or have sudden, unexpected expenses, your emergency fund, not your credit cards, should be your safety net. Using loans to pay for an emergency simply adds to the cost of the emergency.

3. Pay off your credit card debt.
The average college student has 4.6 credit cards, according to the report "How Undergraduate Students Use Credit Cards: Sallie Mae's National Study of Usage Rates and Trends, 2009."

If you carry a balance, do not put new purchases on your credit card. "If you can't pay for it with cash, you can't afford it, so don't buy it," Hardekopf warns.

4. Set a payment schedule.
If you are not trained in paying bills, it is easy to misplace a bill or pay it late. This can be punished by late
fees and even lower credit scores. The easiest way for young people to pay bills is to do so online with scheduled reminders for payments.

5. "Study" to improve your credit score.
Your credit score is more important than just about any other grade you received in college. It is the number
that lenders, employers, and even renters will use to judge you. A high score (FICO 720) will get you the lowest rates and save money on auto, credit card and mortgage loans.

Pay your bills on time. Keep your credit card balances under 30% of your credit limit. Build a long and solid payment history with your credit cards.

Monitor your credit history with free annual credits reports through You can get a free credit report from each of the three credit agencies (Equifax, TransUnion, and Experian) each year.

6. Accept reality.
You are the only person who is responsible for your financial future. Your success starts now with the habits you make today.

Your friends will not treat money exactly as you do. Some will go into large debt to get anything they want. Others will be subsidized by their parents and live beyond their means. Don't get caught up with envy and keeping up with the lifestyle of your friends; they are on their own path and comparisons can be tormenting.

"In the real world, finances are a balance. You won't always be able to afford what you want when you want it. But sometimes you save up enough. Sometimes you even have a little more than you expected. Spend
a little, save a little, share a little," Bill said.

7. Don't fall in love with someone for money, but make it a priority and pay attention to how your potential mate handles money.

Financial personality should be part of the screening process for a possible mate. Marriage unites not only your lives, but your finances and credit scores. Don't wait until the first month of marriage to ask how much credit card and student loan debt they have--then it is too late. Can you make a payment plan together now and reduce that debt before you get married? If they are a free-spender with significant debt and you are a saver with little or no debt, deal with this now because these are issues that will cause conflict in marriage.

And here's one for our proud parents:
8. Parents must start early to prepare their students for financial independence.

Put your college kids on a budget. Give them a fixed amount of money every month that is just enough to cover their expenses each month and they will learn to control their spending--a skill they must have when
they are on their own. One day they will have to survive in the world without the bank of unlimited funds from their parents. Will they be able to handle this? Or have they been spoiled and developed bad financial habits that don't magically disappear when the paycheck and the bills are in their name.

The CARD (Credit Card Accountability, Responsibility and Disclosure) Act makes it harder for students to get credit cards.
College is a good time to start building a credit history. Young adults under 21 are now required to show proof of income or have an adult co-sign on a new credit card account. A parent should only co-sign if
they are certain their student can use the card responsibly since mistakes by the young adult can severely damage the parent's credit score. But if the student is responsible, it can help the young adult build their credit
history. A secured credit card that reports to a credit agency is another option although the fees on these cards can be expensive.

"It is the parents' or guardian's responsibility to prepare young people for taking care of their own finances. This is not an education they should learn by making their own mistakes. Even a few late payments can create significant financial damage that can put a young adult far behind," Bill said.

Leave a comment and let us know what you think and what techniques you're using to gain your financial footing...

Friday, June 18, 2010

Winning by Not Losing

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Given a choice of (1) participating in the best days of the market or (2) missing them altogether along with the worst days of the market, which would you choose?

In a study conducted over 25 years of S&P 500 index history, the answer is surprisingly consistent. Investors don’t need to participate in the best days of the market if they can miss the worst days. Missing both the best and worst 10, 20, 30 or 40 days of the S&P 500 returns outperforms the index by more than 1% annually. Over the 25-year history of the study, that 1% is the difference between a $100,000 investment turning into $673,836 versus $846,624 – a $172,788 or 25% increase in value.

S&P 500 – 25 Years Ending Dec. 31, 2009 – Average Annual Return 7.93%
Miss the BestMiss the WorstMiss Both Best and Worst
10 days4.83%12.14%8.92%
20 days2.79%14.74%9.28%
30 days1.12%16.93%9.56%
40 days-0.46%18.86%9.67%

Source: Hepburn Capital Management 2009 Study

With that said, keep in mind this is a hypothetical example and there’s never been an investment strategy that missed just the best and worst days of the market. This study also doesn’t take into account management or trading fees that might be incurred in implementing such a strategy. Nor can you invest directly in the S&P 500 index.

What this example does demonstrate is how important not losing can be to an investor.

2008-2009 was a perfect example. The average mutual fund was up 34.9% in 2009 according to Morningstar. Unfortunately the average loss in 2008 was -40.5%, again according to Morningstar data. At the end of 2009, despite one of the best years for the S&P 500, the average mutual fund was still down -19.7%  from where it started in 2008. If that doesn’t seem to add up, you need to do the mathematics of gains and losses. A 40.5% loss needs a 68% gain to make it back to breakeven because you are starting from a much small balance.

Next week, I’ll be sharing some thoughts on the whole BP disaster.
Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

Personal income up in Connecticut and most states

State personal income growth across the nation averaged 0.9 percent in the first quarter of 2010, up from 0.5 percent in the fourth quarter of 2009, according to estimates released today by the U.S. Bureau of Economic Analysis (BEA).

Personal income is the income received by all persons from all sources and is measured before taxes are deducted.

Nationally, personal income grew to $12.1 trillion in the first quarter this year, compared to a 2.3 percent decline to $11.9 trillion in the first quarter of 2009.

In Connecticut, personal income grew by 0.6 percent to $193 billion, compared to a 3.6 percent decline to $189.9 billion in the first quarter a year ago.

Use this BEA spreadsheet to find your state.

It declined last quarter in all but two states with growth ranging from 1.6 percent in Mississippi to –2.0 percent in North Dakota. Inflation declined to 0.4 percent in the first quarter from 0.6 percent in the fourth quarter of 2009.

Turning to property income, that  fell 0.4 percent nationally in the first quarter as declines in dividends offset rises in interest and rental income. Property income fell the most in Wyoming, 1.2 percent, reflecting the relatively high share of dividends in that state's property income, while rising by 1 percent in Louisiana, boosted by an increase in homeowner assistance payments related to Hurricane Katrina.
Property income is rental income of persons, personal dividend income, and personal interest income

The BEA said the industry making the largest contribution to first-quarter personal income growth nationally was health care. The administrative and waste management industry and the military made the next largest contributions. Members of the military received a 3.4 percent pay raise in the first quarter but federal civilian workers received an average 2.0 percent increase.

Construction and real estate earnings continued to fall, the quarterly report said.

Friday, June 11, 2010

50 Statistics About The U.S. Economy That Are Almost Too Crazy To Believe

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Another week goes by where the stars are all lined up for the stock market to rally significantly, yet no progress was made. For the third time since the Flash Crash of May 6, we saw a very constructive session on June 8. Once again, it’s time for the bulls to show up and make something happen or the recent lows around Dow 9800 will open like a trap door. Except for the unusually long period of time the market is taking to get into gear (somewhat of a concern in itself), nothing has really changed. We are “supposed” to be rallying, at least in the short-term.

As many of you know, I love to read about the markets, economy and geopolitics. The more someone is in disagreement with my own thinking, the closer I read their comments to see if I am missing something. Every now and then, I stumble across something so interesting; I want to share it with folks.

The following is an article well worth your time to read. It was originally emailed to me by the fine folks at Casey Research who offer free and paid newsletters that focus more on hard assets, like gold, and usually have a negative bent to their work. For full and proper attribution, Casey Research, reprinted it from Business Insider's column by Michael Snyder. I hope it opens your eyes as much as it did mine!

"50 Statistics About The U.S. Economy That Are Almost Too Crazy To Believe"

Most Americans know that the U.S. economy is in bad shape, but what most Americans don't know is how truly desperate the financial situation of the United States really is. The truth is that what we are experiencing is not simply a "downturn" or a "recession". What we are witnessing is the beginning of the end for the greatest economic machine that the world has ever seen. Our greed and our debt are literally eating our economy alive. Total government, corporate and personal debt has now reached 360 percent of GDP, which is far higher than it ever reached during the Great Depression era. We have nearly totally dismantled our once colossal manufacturing base, we have shipped millions upon millions of middle class jobs overseas, we have lived far beyond our means for decades and we have created the biggest debt bubble in the history of the world. A great day of financial reckoning is fast approaching, and the vast majority of Americans are totally oblivious.

But the truth is that you cannot defy the financial laws of the universe forever. What goes up must come down. The borrower is the servant of the lender. Cutting corners always catches up with you in the end.

Sometimes it takes cold, hard numbers for many of us to fully realize the situation that we are facing.

So, the following are 50 very revealing statistics about the U.S. economy that are almost too crazy to believe....

#50) In 2010 the U.S. government is projected to issue almost as much new debt as the rest of the governments of the world combined.

#49) It is being projected that the U.S. government will have a budget deficit of approximately 1.6 trillion dollars in 2010.

#48) If you went out and spent one dollar every single second, it would take you more than 31,000 years to spend a trillion dollars.

#47) In fact, if you spent one million dollars every single day since the birth of Christ, you still would not have spent one trillion dollars by now.

#46) Total U.S. government debt is now up to 90 percent of gross domestic product.

#45) Total credit market debt in the United States, including government, corporate and personal debt, has reached 360 percent of GDP.

#44) U.S. corporate income tax receipts were down 55% (to $138 billion) for the year ending September 30th, 2009.

#43) There are now 8 counties in the state of California that have unemployment rates of over 20 percent.

#42) In the area around Sacramento, California, there is one closed business for every six that are still open.

#41) In February, there were 5.5 unemployed Americans for every job opening.

#40) According to a Pew Research Center study, approximately 37% of all Americans between the ages of 18 and 29 have either been unemployed or underemployed at some point during the recession.

#39) More than 40% of those employed in the United States are now working in low-wage service jobs.

#38) According to one new survey, 24% of American workers say that they have postponed their planned retirement age in the past year.

#37) Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008. Not only that, more Americans filed for bankruptcy in March 2010 than during any month since U.S. bankruptcy law was tightened in October 2005.

#36) Mortgage purchase applications in the United States are down nearly 40 percent from a month ago to their lowest level since April of 1997.

#35) RealtyTrac has announced that foreclosure filings in the U.S. established an all-time record for the second consecutive year in 2009.

#34) According to RealtyTrac, foreclosure filings were reported on 367,056 properties in March 2010, an increase of nearly 19 percent from February, an increase of nearly 8 percent from March 2009, and the highest monthly total since RealtyTrac began issuing its report in January 2005.

#33) In Pinellas and Pasco counties, which include St. Petersburg, Florida, and the suburbs to the north, there are 34,000 open foreclosure cases. Ten years ago, there were only about 4,000.

#32) In California's Central Valley, 1 out of every 16 homes is in some phase of foreclosure.

#31) The Mortgage Bankers Association recently announced that more than 10 percent of all U.S. homeowners with a mortgage had missed at least one payment during the January to March time period. That was a record high and up from 9.1 percent a year ago.

#30) U.S. banks repossessed nearly 258,000 homes nationwide in the first quarter of 2010, a 35 percent jump from the first quarter of 2009.

#29) For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.

#28) More than 24% of all homes with mortgages in the United States were underwater as of the end of 2009.

#27) U.S. commercial property values are down approximately 40 percent since 2007, and currently 18 percent of all office space in the United States is sitting vacant.

#26) Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010. That was almost twice the level of a year earlier.

#25) In 2009, U.S. banks posted their sharpest decline in private lending since 1942.

#24) New York state has delayed paying bills totaling $2.5 billion as a short-term way of staying solvent but officials are warning that its cash crunch could soon get even worse.

#23) To make up for a projected 2010 budget shortfall of $280 million, Detroit issued $250 million of 20-year municipal notes in March. The bond issuance followed on the heels of a warning from Detroit officials that if its financial state didn't improve, it could be forced to declare bankruptcy.

#22) The National League of Cities says that municipal governments will probably come up between $56 billion and $83 billion short between now and 2012.

#21) Half a dozen cash-poor U.S. states have announced that they are delaying their tax refund checks.

#20) Two university professors recently calculated that the combined unfunded pension liability for all 50 U.S. states is 3.2 trillion dollars.

#19) According to, 32 U.S. states have already run out of funds to make unemployment benefit payments, and so the federal government has been supplying these states with funds so that they can make their payments to the unemployed.

#18) This recession has erased 8 million private sector jobs in the United States.

#17) Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of 2010.

#16) U.S. government-provided benefits (including Social Security, unemployment insurance, food stamps, and other programs) rose to a record high during the first three months of 2010.

#15) 39.68 million Americans are now on food stamps, which represents a new all-time record. But things look like they are going to get even worse. The U.S. Department of Agriculture is forecasting that enrollment in the food stamp program will exceed 43 million Americans in 2011.

#14) Phoenix, Arizona, features an astounding annual car theft rate of 57,000 vehicles and has become the new "Car Theft Capital of the World."

#13) U.S. law enforcement authorities claim that there are now over 1 million members of criminal gangs inside the country. These 1 million gang members are responsible for up to 80% of the crimes committed in the United States each year.

#12) The U.S. health care system was already facing a shortage of approximately 150,000 doctors in the next decade or so, but thanks to the health care "reform" bill passed by Congress, that number could swell by several hundred thousand more.

#11) According to an analysis by the Congressional Joint Committee on Taxation, the health care "reform" bill will generate $409.2 billion in additional taxes on the American people by 2019. #10) The Dow Jones Industrial Average just experienced the worst May it has seen since 1940.

#9) In 1950, the ratio of the average executive's paycheck to the average worker's paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.

#8) Approximately 40% of all retail spending currently comes from the 20% of American households that have the highest incomes.

#7) According to economists Thomas Piketty and Emmanuel Saez, two-thirds of income increases in the U.S. between 2002 and 2007 went to the wealthiest 1% of all Americans.

#6) The bottom 40 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.

#5) If you only make the minimum payment each and every time, a $6,000 credit card bill can end up costing you over $30,000 (depending on the interest rate).

#4) According to a new report based on U.S. Census Bureau data, only 26 percent of American teens between the ages of 16 and 19 had jobs in late 2009, which represents a record low since statistics began to be kept back in 1948.

#3) According to a National Foundation for Credit Counseling survey, only 58% of those in "Generation Y" pay their monthly bills on time.

#2) During the first quarter of 2010, the total number of loans that are at least three months past due in the United States increased for the 16th consecutive quarter.

#1) According to the Tax Foundation’s Microsimulation Model, to erase the 2010 U.S. budget deficit, the U.S. Congress would have to multiply each tax rate by 2.4. Thus, the 10 percent rate would be 24 percent, the 15 percent rate would be 36 percent, and the 35 percent rate would have to be 85 percent.

FYI, I will be on CNBC’s Squawk Box this Thursday, June 17, at 6:10am.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

Friday, June 4, 2010

Is Inflation STILL Dead?

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Last week, I talked about the Summer Rally Trying to Begin. The stock market was showing classic signs of being washed out of sellers with so many indicators reaching extreme levels, like pulling the rubber band and finally letting go to snap back in the opposite direction. Everything was set up for a rally to begin, unless of course, it was one of those once every 10 or 20 years where the system temporarily breaks and we see an elevator shaft mini crash. The odds heavily favored the rally.

Fast forward a week and the market is basically in the same spot. We saw two modest down days and one big up day, plus today (June 3) which is up slightly as I write this. Stocks are “supposed” to get in gear to the upside now, but they are certainly taking their sweet time. The longer it takes to really get going from an extreme oversold condition, the less powerful the rally usually is.

Since I stand by my year old forecast that the next rally is the last one before a major correction sets up, the market continues to live on borrowed time. As a bull, I would like to see the Dow Jones close above 10,500 to confirm the bottom has been hammered in and set the stage for a move towards 11,000. I reiterate my risk/reward comment from last week that it’s plus or minus 5% on the downside and 10-15% on the upside.

Although I’ve been very positive on gold since Gold Getting Ready for Another Assault in mid March, my position has not changed one bit in the past THREE YEARS that inflation is dead, kaput, dormant, asleep, etc. As I’ve mentioned before I am far from a gold bug, even though our firm has more assets in our two gold strategies than the other seven and rising gold has significant benefits here.

Research has shown that gold is not a good predictor of inflation nor is it the best protector against inflation. In industry jargon, you could say that gold is not highly correlated to the CPI, which is the consumer price index, a popular measure of inflation.

For a long while, I’ve struggled to figure out how I could be positive on gold, yet still believe that deflationary forces are the dominant player in our economy. Deflation, the general decline in the price of goods and services, is the exact opposite of inflation and was the topic here last year, DEFLATION: The REAL Boogeyman to Fear. During “normal” deflationary times (if you can even use such a cavalier word for this), which there are only two modern day examples, almost all assets decline in value. It’s often referred to a black hole or spiral as the gravitational pull sucks everything in and won’t let it out.

Anyway, during deflation, as we saw in the 1930s and Japan since 1990, gold declines along with other hard assets. As we saw in 2008, there is mass run to the safest currency, the U.S. dollar, along with other “safe” instruments like treasury bills, notes and bonds.

So, if I think deflation has more to play out, how can this foot with being positive gold?

My answer comes from looking across “the pond”. The Atlantic Ocean, that is. The only way I can see gold rallying during another bout of deflation is if we see a stampede away from paper currencies. We’re all watching the mini collapse of the Euro currency now as their problems continue to worsen. What if those problems spread to Asia and back to America later this year and into 2011 and 2012? Wouldn’t that cause the global governments to fire up the printing presses that would make 2008 look like a picnic? That’s the only way I can see gold rallying with deflation. It’s not a pretty picture and I pray the various Feds and governments wake up fast enough to head off that stampede.

Back to inflation (or the lack thereof) to finish this post. I never bought the idea when the Fed began printing money and creating all these cutting edge, outside the box programs that inflation would rear its ugly head. And when they went to Red Alert, their quantitative easing programs and began buying treasury bonds and mortgage backed securities, I knew Bernanke was in panic mode that a deflationary spiral was setting in.

I’ve said this for three years now. Ben Bernanke would light up a cigar, open the best bottle of wine he could find and do a victory dance if the Fed could somehow engineer a little inflation. With wage growth negative, capacity utilization modestly recovering from the abyss and money velocity tame, there is almost zero chance for problematic inflation until we overcome the deflationary pressures.

FYI: I will be on CNBC’s The Call on Mon., June 7 between 11:05am and 11:20am.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC