The Debt Crisis Continues—It’s
Like a Credit Card Shopping
Spree After Losing Your Job

The credit crisis in the U.S. and globally is growing by the day. It’s the same thing as being able to service a credit card with a large outstanding balance. As soon as the ability to service this debt comes into question, the problem starts to get worse exponentially.The spot price of gold is now well above $1,800 an ounce and gold stocks are reaping the benefits. Right now, the stock market is experiencing a crisis of confidence—not in the ability of corporations to generate earnings, but in the macro sense of country economies, debt and deficits. The global debt crisis is just that—a crisis—and it’s been building up for years.

When you have solid economic growth, an economy can support more debt, because it’s easier to service the interest payments. This is why investors weren’t selling on news of higher deficits and national debts. Traditionally, a central bank would partake in a combination of money-supply growth and cite economic growth as a way to keep dealing with rising debts. Now that the economic growth equation is out of the picture (as virtually all Western countries are experiencing little to no GDP expansion), the problem is growing by the day. It’s the same thing as being able to service a credit card with a large outstanding balance. As soon as the ability to service this debt comes into question, the problem starts to get worse exponentially.

So we have the European sovereign debt issue that the marketplace is worried about. Domestic economic news is negatively affecting sentiment and there is a lingering wariness about the possibility that we aren’t going to get out of the current malaise for quite some time. All this has sapped most of the positive investor sentiment in the marketplace.

My view is that this lackluster scenario (and expectations) will be with us for several months more and, in doing so, will create very good value in the stock market. But, very good values in stocks are meaningless if there’s no prospect for those values to get recognized. Stocks can’t advance in a meaningful way in my view without some sort of capitulation on the part of investors. Only then can the stage be set for a new advance.

Of course, the gold sector is flourishing with all this turmoil. I would say that gold stocks would be even higher today if we were in a bull market, but the top stocks for speculators in this kind of market are almost exclusively with gold. There just isn’t the growth out there in the rest of the economy.

Everything has broken down in this market since the sovereign downgrade of U.S.debt. The railroads corrected significantly and so have technology shares. It’s an across-the-board correction the trading action of which is very similar to what happened the same time last year. The stock market was able to recover from last year’s correction based on the expectation for decent corporate earnings. I think we have about one quarter left of a positive outlook on earnings. Without GDP growth, positive trading action in the fourth quarter is vulnerable.