This statement by Bill Bonner of the Daily Reckoning is a concise description of today’s financial markets:
Investors aren’t buying in anticipation of higher earnings or looking forward to a healthier economy. They’re not padding their retirement nests with great stocks at great prices, or participating in the growth and prosperity of 21st century America by buying equities. Instead, they’re gambling that the economy will get worse…and that Bernanke will be forced to go boldly where only fools and morons have gone before….
…that is, on the road to hyperinflation.
These are difficult times for investors. They are wonderful times for speculators. Speculators will make (and lose) a lot of money over the next couple of years. In my opinion, investors are likely to lose. Prudent investors might better avoid financial assets for awhile. Traditional wisdom is apt not to apply to what is coming.
Ultimately, the question is not how high gold can go, its how low fiat currency can go. While the debate about whether gold is in a bubble or whether we are in a deflationary or inflation environment continues, the monetary authorities in the developed world have embarked on a well-publicized campaign of currency devaluation via low interest rates. Central banks can control interest rates or exchange rates – not both – and they are opting for record low interest rates with little concern for the debasing consequences. There should be no debate on this matter – central banks have a perfect track record in one area and that alarmingly is in currency devaluation. The US and Canadian currencies have suffered a greater than 95% loss in purchasing power since the inception of their respective central banks. Enquirica Research has published a report – “Guide to Inflation Hedging 101″ go to http://www.enquirica.com/index.php?option=com_content&view=article&id=11&Itemid=19 and signup for access.
[...] Aggresivity or Gold: what is needed in the current investment climate Filed under: investment tips — P. W. Dunn @ 7:58 am Tags: aggresivity in investing, deflation, fiat currency, gold, HELOC, inflation, mortgage, QE2, quantitative easing, selling put options, silver, Year of Jubilee These are difficult times for investors. They are wonderful times for speculators. Speculators will make (and lose) a lot of money over the next couple of years. In my opinion, investors are likely to lose. Prudent investors might better avoid financial assets for awhile. Traditional wisdom is apt not to apply to what is coming. Monty Pelerin, “Speculators Only” [...]
[...] from a knowledable reader (P. W. Dunn at http://righteousinvestor.wordpress.com) to a recent post, Speculators Only. It provides insight into how he is trying to navigate these treacherous markets and what he [...]
There is the saying, “Those who remain calm while others panic, don’t know what the hell is going on.” It is a troubled time and I genuinely feel bad for what central banks are doing to people’s savings. But as you say, speculators will make and lose a lot of money. The biggest winners today are those upon whom Bernanke’s shines his favor, such as the big banks that borrow money from the Fed and lend it back to the government, which is perhaps the biggest Sopranos-type racket going: but it’s not some kind of under the table pay-offs, but it’s being done right in front of all of us and with impunity.
The 2008 market crash has been particularly devastating on people’s savings. They were forced by inflation to buy so-called “risky” instruments, esp. stocks. Then that bubble burst twice in less than a decade. Stung by that, they are still too scared to bet on the market again, and so Bernanke, and the other sovereign banks around the world, have robbed them blind through their loose monetary policies. In Canada for example, there has been something like a 20% increase in the cost of houses since the summer of 2008, due to the Bank of Canada keeping the interest rates at ridiculously low rates. So you can’t sit on cash–because the riskiest investment in an inflationary environment is cash in a savings account that pays 1%. Here in Canada since the nadir of the stock market crash, such cash has lost about 19% against real estate and much more against stocks and gold.
The stock portfolio I manage is now almost all commodities (oil & gas, gold mining), 100% Canadian-based (as I live in Canada), and I am shorting the US dollar to buy these companies. I am selling cash or margin covered puts (on oil & gas, gold-mining companies, etc.) for income (which gives from 5-10% downside protection) and, because I can’t trust my margin to stay high in market downturn, I am accumulating unused lines of credit as my hedge against deflation,with the view of seizing the day if there is a market crash. I believe the investor must be aggressive and engaged–you can’t have a “lazy” portfolio today (John Mauldin said the same in his most recent interview with Steve Forbes). The goal must be to beat inflation, and the higher that goes, the more aggresivity is necessary. Or if I had to sit out as you suggest, then I would put most of my funds into silver, gold, non-perishable foods, or other commodities–things with durative and intrinsic value (gold and silver are liquid and so are excellent choices, but you have to have a safe place to put it). Most people’s best hedge against inflation is still their mortgage, as Bernanke’s devaluation of the dollar will also reduce everyone’s debts. It’s the Year of Jubilee, when everyone’s debts will be canceled, especially the Federal government’s. Or as Dickens says, “It was the best of times, it was the worst of times … ”
PS: By the way, thanks again for keeping up the blogging.