Richard Russell Bends With The Wind

As reported on by Mark Hulbert, veteran goldbug Richard Russell has gone with the recovery trade by going bullish on high-quality dividend paying stocks. Russell now believes that stocks will outperform gold.

What made Russell change his mind: His belief that dividend-paying blue-chip stocks are themselves good inflation hedges. And while he remains bullish on gold too, because it also is such a good inflation hedge, he thinks there is the distinct possibility that blue-chip stocks will do even better in coming weeks and months.

Russell’s argument about stocks as a good inflation-hedge prompted me to review the historical record, since most investors would disagree with him.

But it turns out that Russell is right: Over the last century, corporate earnings have tended to increase during periods of rising inflation and fall when inflation is declining. (Click here to read an academic study reviewing the historical record in this regard.)

This is not as counter-intuitive as you might think. When inflation is high, companies are able to raise prices and hence fatten their bottom line. By the same token, when inflation is low, firms’ pricing power is correspondingly low.

A few commenters to the original article said that Russell`s timing may be off, given that he was a bear on stocks from 2003 until 2007 and changed to bull near the top. That wasn`t meant as a slur, just as a consequence of him being a permabear at heart. Permabears turning bullish tend to occur at tops, just as permabulls turning bearish are indicative of bottoms. The former group yield to excitement, while the second group capitulate. For a time, James Dines was notorious for issuing his `Much-Vaunted One-and Only Gold and Silver Sell Signal` almost right at the 1982 bottom in gold. That misplaced signal represented the final capitulation to the vicious 1980-82 precious metals bear market.