Montreal, Canada

Sovereign Society’s first Wealth Symposium in Montreal was a success. Over 400 delegates, mostly from the United States and Canada, attended our conference last week and everyone enjoyed the event.

Our members, typically a Den of Bears on the U.S. dollar and the economy, generally wanted to diversify away from the U.S. dollar, despite the buck’s surge since November versus most European currencies. Many emerging market and resource currencies were smashed over the last several days, including the Norwegian krone, down more than 10% this month.

Delegates were also concerned about the direction of the economy, the fate of the EUR and what the endgame meant for world markets amid a parade of central bank printing since 2008. Many also wanted to know whether gold was in a “bubble” and if this rally was approaching an end.

My take on the world markets remains rather bearish.

The stock market suffered major technical damage over the last two weeks triggered by the “flash crash” on May 6 and last Thursday’s 400-point plunge on the Dow. From its 2010 high, the S&P 500 Index is down 10.6% this morning. The MSCI World Index, driven sharply lower last week amid plunging stock values and a soaring dollar (over 50% of the index is weighted to foreign equities) is down 14% below its 2010 high.

The CRB Index of raw materials is 14.4% below its 52-week high with crude oil falling sharply again last week as inventory levels in the United States hit multi-decade highs. Gold prices also declined last week – a disappointment considering we hit all-time highs a week prior.

Since markets hit a low in March 2009 I’ve not felt comfortable riding stocks and most other risk-based assets. That’s largely because this is not a normal economic recovery; big government is all over the place supporting several important asset markets, manipulating market-based capitalism.

Germany’s ruling to ban naked short-selling last Tuesday dealt another blow to investors as governments raise the bar on their attack on speculators. These are not normal times.

The big question is whether this marks a new phase of the credit-induced bear market taking equities down further or another in a series of corrections that ultimately will be a buying opportunity. I’m not sure. One thing I am confident about, however, is that I’ll use a market rally over the next few weeks (markets are heavily oversold) to reduce stocks.

I’m still very bullish on gold and silver. It’s very clear to me that world governments are losing control of the exchange-rate system, printing gobs of money to alleviate credit and other market-related stresses, eventually resulting in the worst inflation since the 1970s over the next several years.

My advice for newcomers in the gold market is to buy 50% of their target allocation right away and the remaining stake on corrections. The same is true for silver. I think silver, on a total return basis, will outpace gold over the next 36 months. Still, I remain heavily over-weighted in gold, not silver.

Many would-be gold investors have missed the rally and fail to understand what is happening to paper money and their long-term purchasing power; this failure or ignorance will cost them dearly down the road as gold continues to defy the bears and mounts new highs in 2010.

Large-cap stocks in the United States and eventually, in Europe, should be targeted as equities decline. Many U.S. companies now derive a significant portion of their revenues from overseas markets – many from China. That trend is likely to continue. Also, quality blue-chip stocks should outpace bonds over the next decade because of higher inflation and the formers’ ability to raise prices. Dividends for many consumer staple stocks – my favorites – yield north of 3% or 3.5%.

In Europe, the EUR is bound to stabilize at some point. And after crashing from 1.60 in late November to 1.26 now, European exporters will earn big profits on the currency shift. That should boost earnings.

I’d even bet that over the next ten years major market stocks might outpace emerging market stocks – despite the Western debt crisis, currency woes and heavily marginalized growth rates.
In almost each prior debt or currency crisis over the last 30 years investors would have earned big double-digit gains buying stocks following IMF or government intervention; anyone who purchased Russian stocks in late 1998 or emerging Asian equities that same year is currently sitting on impressive gains. This was also the case for credit investors heading into 2009 amid a near-disaster across many markets. The same is likely to occur in the West, I think.

Still, I won’t over-weight equities any time soon. Too many hurdles on the macroeconomic front will pressure stocks and most other risk assets because markets are forcing governments to reduce spending, which is deflationary. This is probably the case in Europe more than anywhere else and that won’t be bullish for economic growth or inflation over the near-term.

In the United States, President Obama is not a friend of the individual investor; the Bush tax cuts expire in 2011, tax rates will rise and investors will have to contend with higher lending rates at some point from almost zero percent now. That’s not the sort of tax-based environment that’s conducive to easy stock market profits.

One thing is almost certain: Volatility will remain a prevalent theme over the next several years as the credit crisis continues to spread its tentacles, governments attack speculators and a sovereign or private sector default smashes into the financial system. Not a pretty picture I’m afraid.