While I share the great concern about her destructive economic policies of this administration, I am getting a contrarian tick about the dollar and gold.

Every right wing talk show and business TV show is flooded with adds selling gold to consumers.  “The dollar decline is inevitable” the pitchmen warn, “Gold is the only safe money.”

When there is this much noise and whenever anything is inevitable it is time to be cautious.

I remember during the seventies when inflation seemed inevitable. The doomsday newsletters like Harry Brown and Howard Ruff had middle class investors buying gold coins, opening us accounts in Swiss banks and investing in Swiss Franc CDs.  Gold reached over 800 dollars an ounce.

And then the inevitable did not happen.

Volcker and Reagan wrestled inflation out of the system, the dollar soared and gold plummeted. Silver which ran as high as $50 an ounce came crashing down to under $5. The real reason for its rise and spectacular bubble was not the desire for sound money but the manipulations of the notorious Hunt brothers.

Middle class investors who bought into the fear and invested heavily in foreign currencies and gold were badly damaged.

It is challenging enough to get accurate information about domestic stocks. Understanding the factors affecting currency values and foreign markets are far beyond the scope of middle class investors (and most professional investors as well.)

Interest rates are near zero. They cannot go down any further, and given the deficit will likely go up.  When interest rates go up the costs of holding a non interest bearing asset like gold goes up, and this puts down ward pressure on the price of the metal.

While the dollar may seem vulnerable its value on world markets are relative to other currencies. As we see the Dubai fantasy teetering on the brink of bankruptcy and countries like Greece nearing default, the dollar may start looking better if for no other reason than other countries are looking worse.

The amount of uncertainty multiplies greatly when you leave our borders. If you are concerned and want some gold limit your exposure to 10% of  your assets and even dollar average that to avoid buying at a top. Consider gold stocks like Newmont or Goldcorp that you can sell easily and quickly if the market turns against you.

Do not put gold in your 401k or retirement account. The tax protection is better suited to income investments, even low yielding but secure Treasuries. If you think interest rates are going up (I do) avoid long term bonds of any nature. Bond face values drop as interest rate rise.

Successful investing requires controlling your emotions.  Anger and fear over this administration’s policies can easily influence your investment decisions.  Rarely does such emotional influence lead to better decisions.

Is this a good time to buy?

Yes and no. The contrarians are salivating but one can not discount the real risk in this market. Obama’s policies are so radically different on so many different levels that there is a chance that the game may be changed for a decade.

It would be foolish to expect a rapid resurgence in prices. It will likely be a long slow slug from current levels. One should not be testing bottoms here without a lot of patience.

But it would be a good time to begin to buy the strongest players in the weakest industries; especially steel, cars, and banks. A more conservative play would be to starting frequent buying of low cost index funds, especially if the market continues to fall.

Here is my gut risk assessment of this market. There is a 50% chance that we are less than a 1000 points away from a bottom. While 1000 points seems like a wide margin it is small considering the 6,000 drop in the last 9 months. Even if we do bottom above a 6,000 Dow the time frame could be long. This is no time for impatient investors.

I see a 20% chance that the market could drop far beyond 6,000 to say 4,000 and a 10% chance it can go beyond that. I see a 10% chance that we could rebound significantly and rapidly from near current levels. I see this last probability largely because of the massive monetary infusion. The market may benefit from inflation.

Cash and patience are king, but opportunities are available that we may not see again in our lifetimes.

Conversation is fluid between those who believe this is the best time to buy stocks and those who believe that it is the worst time.

Pure contrarian thinking gets more excited about the possibilities the more negative the news gets. They pray for blood in the streets. The best ally of the contrarians is the media who tend to more negative than reality, driving panic and excessive selling. True contrarians must ignore the media. It takes deliberate focus.

On the good side is that there is enormous liquidity in the market. While the loose monetary policy under Greenspan is largely to blame for the financial panic, the fed is responding to this crisis with even greater liquidity. This money must eventually go somewhere. Fear is keeping it in low yield and low risk invenstment.

While unemployment is rapidly growing it is still low comparative to other recessions, and a fraction of the numbers during the Great Depression.

For the time being inflation is low, fuel prices are down as well as other industrial commodities, housing is far more affordable, and wage increases will be restrained by the poor business climate.

Historically stock prices are low, but that does not mean that they can not go lower. A very bright close friend in the real estate business noted that the market can remain irrational much longer than most people can remain liquid.

This does not mean that business will get better quickly or that Obama has the right answer. Raising taxes, reducing deductions, appointing federal czars to ‘oversee’ private industries, bailing out dying businesses, promoting unionization, subsidizing bad behavior, trying to support housing prices that were inflated by poor fed policy, massively increasing spending on health care, education, and every other ‘worthy’ cause, increasing welfare spending, lengthening unemployment benefits, massive infrastructure outlays during a time of declining earnings and tax generating income seems antithetical to every lesson we have learned in the last 100 years about fiscal discipline.

Obama has clearly fulfilled his campaign promise of change but he has avoided the far more difficult problem of choice. He intends to have it all. The street understands the tremendous risk of his policies.

The contrarian choice believes that we will return to a historical trend. The market extremities that flew above the mean have dropped well below the mean and will eventually return to the mean.

But if Obama’s radical reversal of numerous policies at one time signals a reversal of a long term trend then the contrarians may be wrong. Investors constantly read the disclaimer that past results are not indicative of future expectations, but they may be having trouble truly believing it at a time when they should be giving it very special consideration.

While some stocks are selling at valuations lower than we have ever seen, that doesn’t mean this market is without real risk. With such dramatic changes the game may be changed for years to come.

But certainty in the market carries a very high premium. The two best assets now are patience and cash. It will likely be a slow slugfest to return to market highs. But it would be a good time to start buying the strongest players in the weakest industries. The market may have long discounted the worst that can happen in those industries. A reasonable speculation would be to start slowly placing money in a low cost index fund.

It seems simple to acknowledge the wisdom of buying low and selling high, but this market clarifies why some wisdom that seems easy to understand can be so difficult to execute.

It is amazing what intelligent people are willing to believe when paid enough money.

So many of the rich and the elite willingly invested with Madoff in spite of suspiciously good returns. “I don’t know how he does it, he just does,” was a common response to those who questioned his method. Certainly his stature as an ex Nasdaq chairman gave him a credibility, but should that have entitled him to a secret no one else in the investment world possessed?

To even a modest analyst or regulator his claim of an options strategy should have alerted their skepticism; there weren’t enough options in the market to fund such a strategy for the amount of money he had invested. But the sheer size of his fund gave him legitimacy. Many of the rich elites he managed felt entitled to the superior returns that are unavailable to the little guy left with mutual funds with high fees.

Yet the little guy expecting his house to appreciate year after year was just as foolish. ‘Get rich quick’ hucksters and the real estate industry knew that pure demographics would be putting pressure on housing. Retiring baby boomers would be downsizing and moving into smaller homes, with fewer younger parents to buy the old larger homes.

Markets regress to the mean. Housing, gasoline prices, China, scrap, tech stocks- nothing goes up for ever. Nor have I ever seen a market rise exponentially and then just level off.

I do not think it is just a coincidence that the bursting of the housing bubble and the outing of Madoff happened simultaneously. Government sponsored Fannie Mae and Madoff are one and the same; they pushed impossible returns using plain deceit that everyone was willing to believe as long as they profited from it.

But while Bernard Madoff will be drawn and quartered in the public square (justifiably in my opinion), no one from Fannie Mae will serve a day in jail.

John Bogle writes in the Wall Street Journal Online-

Beware of market forecasts, even by experts. As 2008 began, strategists from Wall Street’s 12 major firms forecast the end-of-the-year closing level and earnings of the Standard and Poor’s 500 Stock Index. On average, the forecast was for a year-end price of 1,640 and earnings of $97. There was remarkably little disparity of opinion among these sages.
Reality: the S&P closed the year at 903, with reported earnings estimated at $50.
Strategists aren’t always wrong. But they have been consistent, betting year after year that the market will rise, usually by about 10%. Thus, they got it about right in 2004, 2006 and 2007, but also totally missed the market declines in 2000, 2001 and 2002, and vastly underestimated the resurgence in 2003.

Ignore the forecasts of inevitably bullish strategists. Bearish strategists on Wall Street’s payroll don’t survive for long.