Saturday, October 10, 2009

Kudlow's Recovery Measurement

Yesterday Larry Kudlow asked an interesting question: what if I do not treat gold simply another investment to measure, but instead as the basis of comparison (instead of the dollar) for all other investment growth.
In other words, measured in true, gold-backed purchasing power, stocks have really done nothing this year. Zip. It is most disappointing.
First, note that I provided one answer to that question in mid-September, when I wrote about debt-deflation and described how a lending crisis usually requires some inflation as part of the cure. During a recession caused by a debt-bubble bursting, an investor should not expect the entire economy to outpace gold.

(Not that I don't share Kudlow's concern about the overall economy stagnating. I have also worried that too much Federal activity--specifically, trying both stimulus spending and the bond purchases Friedman recommended--will do more harm than good.)

Second, I should point out that Kudlow relies on a generalization that is not currently appropriate to an investor's decision-making. A big issue with this recession is that the S&P 500 and Dow are no longer useful estimates of national economic health because some financial sectors have been flattened while others are doing very well.

Remember my June investment advice? Consider the overseas investments I wrote about: funds for Latin America (FLATX), Southeast Asia (FSEAX), and India (IFN) have all increased twice as much as as gold, one of those more than three times as much. Similarly, the "stimulus plan" favored sectors of materials (FSDPX) and energy (FSENX, FSESX) have increased twice as much as gold. Even the sector of consumer staples (FDFAX) and the MidCap funds (FNMIX, FMIMX) are keeping even with gold or doing twice as well.

Despite the fact that no one can predict the future shape of the national economy after the recession ends, an investor who pays attention to politics can still outperform gold.

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