Updated 3.22.09
Investors must take into account the overall macro trends in the world
and the U.S. markets in order to increase the probability of investing
wisely. In Las Vegas it is possible to win over the short-term sitting
at a black jack table splitting 10's and hitting 16's with the dealer
showing a 5 card up top, but over the long-term going against the
odds like that will decrease your winnings. Financial markets are
exactly the same. Staying on the side of probability or just ahead
of a coming trend change will reap large rewards. With careful study
over years and close contacts daily with experienced market professionals,
it is possible to increase your probabilities of making money in the
markets greatly. We devise our investment strategies by starting with
the macro or longer-term secular trends in the world and market.
Secular Trend #1
Deep bear market in the United States and world
Here is why this bear market we are in, has a long way to go despite
the fact that markets usually rise 6 to 9 months before an economy
bottoms. It took the United States and world a long time to get to
the point we are in today. The entire economy has been expanded through
huge increases in credit and debt. Especially since the crash of 1987,
the central banks of the world led by the private Federal Reserve
bank created an unsustainable credit and debt bubble though their
expansion of the money supply. With the Fed keeping rates artificially
low for too long and politicians taking it upon themselves to mandate
lackadaisical lending standards for home loans, we have become unfortunate
enough to experiance a massive asset bubble that has already spread
far beyond just the housing market. The history of asset bubbles is
clear despite the mainstream media and your local real estate agent
trying to make you believe otherwise. From the Tulip Mania of 1637,
to the South Sea bubble, to the Tech bubble here in the U.S. during
the late 1990's, when asset bubbles burst they ultimately result in
the price gains in that asset resetting all the way back down to where
the price bubble began inflating. Under usual bubble circumstances,
the asset prices typically over correct, dropping to a lower price
then the pre-bubble price. The Tech bubble in the late 1990's led
to peak NASDAQ prices over 5000 and the NASDAQ still has never recovered,
trading near 1400 today, over 9 years later. All the inflated values
in Tech companies were taken back after the bubble burst. Japan also
experienced a real estate led bubble that helped get their Nikkei
stock market average to a high of 39,000 in 1989. Japan's central
bank and politicians chose to print huge amounts of currency, bailout
banks and corporations, and provide giant stimulus programs in order
to reflate their economic bubble that burst. Today the Nikkei, 20
years later, trades near 8000. The massive unwinding in the economy
we are experiencing now in the United States from the bursting of
the far more serious debt bubble we have here now compared to a tech
bubble, will take time. We can not go back up in the market over Dow
Jones 14,000 again to falsely inflated asset prices anytime soon no
matter how much we wish we could. That goes for home values and just
about every other asset out there now. The Federal Reserve has employed
the most radical monetary supply increases ever seen in the history
of the world in order to combat the rapid deflation resulting from
the bursting of the debt bubble. This unprecedented action, along
with the massive Trillions in Obama stimulus money due to hit the
economy in late 2009 is a wild card for exactly how the US economy
will react going forward? It is our opinion that any significant increase
in private sector economic activity would be due to rapid inflation
kicking in as all these printed dollars actually flood the system
in late 2009. Businesses and consumers may find it completely wasteful
to save dollars, versus spending them since they may find that their
purchasing power is deminishing, month after month as the US dollar
potentially faces a rapid devaluation. This is what would likely occur
if what the Federal Reserve and US Treasury are choosing to do to
reinflate the credit bubble actually works? We are skeptical it will
work as a long-term solution improving Americans standard of living
over the long haul. As we show on the chart of the S&P 500 below
we have a long way to fall still before we reach the stock markets
pre-bubble prices. There will always be rally's, which in bear markets
can rise as high as 20% to 50% from the the bottom during a multi-month
bear market rally, but this bear has a lot further to fall before
it's all said and done in our opinion. Eventually there will be a
once in a lifetime opportunity to buy and hold a number of very inexpensive
dividend paying blue chip stocks, but that opportunity is not now.
We are projecting that the Dow Jones will eventually fall to at least
4000 going back to between 1990 and 1995 price levels and that the
S&P 500 could also reach those 1990 to 1995 price levels near
400 to 500.
*This chart of the S&P 500 below shows how this bear market rally
we are currently experiancing may play out. The chart of the Dow Jones
Industrial Average would appear very similar to these projections
as the bear market rally runs its course and fails over the next few
months.
Secular Trend #2
Expansion of government control over US economy, world, and personal
freedoms
We remember the horror
felt by many when it became apparent that Russian President and ex-KGB
agent Vladimir Putin was going to expand state control over the Russian
media and potentially begin stymieing free elections in the country.
When communism started the gradual increase in control over Russia
again around 2004 it concerned many in the US media and in world politics.
We find it amazing that similar gradual changes are occurring here
in the United States, South America, and European Union and people
do not seem to understand it’s happening right before their
eyes. As communist China has shown the global community over the last
couple decades that communists can embrace a form of state controlled
capitalism that led to large growth, many political and economic commentators
have begun to look at the economic model in China as something to
aspire to implement around the globe. Our opinion is that we are witnessing
a subtle, yet global push towards more state control over economies.
Eventually, we continue to see this as a step-by-step process moving
toward global government, but for now each region is witnessing a
gradual move towards socialism and fascism. If you don’t have
a close friend or family member in some government agency it may become
darn near impossible to open a successful business or move up the
chain of command if China’s model becomes the economic model
here in the United States. Obviously for something like this to occur
we would have to see the Constitution demolished and we see the Constitution
being disregarded more and more in the United States unfortunately.
Governments increase their control by increasing taxes, increasing
regulation, implementing illegal seizure of property (imminent domain
laws), decreasing personal freedoms of citizens though additional
monitoring, and by increasing joint police and military operations
inside the country. Since Sept 11, 2001 security has been the government’s
main justification for increasing unconstitutional monitoring of citizens
through the Patriot Act, warrant less wire tapping, CCTV cameras in
traffic and in public arenas, etc. These things on the surface seem
to be in all of our best interest, but there is no interest what so
ever in monitoring the illegal aliens sucking the country dry each
day and no interest in enforcing the security of either the Mexican
or Canadian border. It’s mostly our own citizens and grandmas
at the airport experiencing the brunt of this state security control.
From expansion of government control over the banking system through
TARP capital injections, to the government picking and choosing which
bond holders deserve to be paid back first in the Chrysler and GM
bankruptcies, this trend change doesn’t necessarily mean that
economies can not grow and industries can not prosper going forward.
It does mean though that the private sector may continue to shrink
and different industries with the government’s artificial subsidies
will be the primary investment opportunities going forward. We are
using this trend to avoid many of the last century’s growth
opportunities in investing specifically real estate. Personal incomes
may shrink for the middle class in this scenario and there is no where
for housing prices to go but down if this trend continues to play
out.
Secular Trend #3
Gold is in a long-term bull market
Gold is showing huge
relative strength compared to every other asset during this deflationary
debt collapse thus far. The trend remains up and we believe that trend
is about to accelerate by historic proportions. Regardless if we are
inaccurate on gold’s potential or not, this asset has support
when almost no others do. Gold has always been the accepted currency
of all civilizations through out the world. It is our belief that
the world-wide debt collapse and uncontrolled money printing being
used by central banks to offset the deflation and defaulting loans,
is going to lead to a world wide no-confidence vote in the US dollar
soon. The US dollar is the world reserve currency and if it collapses
the entire fiat money world currency system is going to need to be
re-worked. It's likely that gold is showing such strength because
there is historical precedent for gold being used to reflate currency
after a global debt collapse. During the Great Depression which has
many similarities to today's banking crisis, FDR raised the price
of gold by 70% overnight after the US dollar collapsed. FDR pinned
the US dollars value to that new gold standard price in order to get
the world to have confidence in the currency again. People could exchange
that US dollar for a set amount of physical gold if they wanted to.
Since central banks and most governments hold large gold reserves,
it's known that under a world wide currency collapse that Gold or
Silver would likely be used, at least temporarily to reflate the central
banking assets and world governments. based on the stated amount of
gold held in the United States and at the Federal Reserve to monetize
20% of the United States debts and future obligations such as social
security Gold would need to be raised to a price of $10,000 an ounce.
As the dollar drops in value due to never before seen increases in
the money supply due to the Federal Reserve’s policies, we see
large inflation possibilities down the road. Inflation raises the
price of gold but what if deflation overcomes the world economic system?
We see gold being used to reflate the system. As every central bank
and government holds gold reserves just in case something ever happens,
shouldn’t consumers also hold a portion of their assets in the
precious metal? Is gold’s relative strength compared to other
assets over the last 5 years telling us that major increases in gold’s
prices could be a possibility in the near future?
Secular Trend
#4
The US dollar losing its value
Inflation is the stated policy of the U.S. federal government and
the private Federal Reserve central bank. Inflation is the devaluing
of a currencies purchasing power. The reason governments and central
banks expand the money supply (print money) to monetize government
debts, is to pay back debts by transferring the burden of the debts
on to the back of citizens and tax payers. It’s easier for government
bureaucrats to spend wildly and transfer the debt repayments this
way. As governments expand in size and spend more money then they
take in as tax revenue, the costs of goods and services in the economy
typically rise due to inflation. Many people find that the money they
had saved over decades of working, just will not carry them as far
as they had planned over the course of their retirement. Since the
Federal Reserve was created in 1913 the US dollar has lost 94% of
its value. In a small example, a candy bar used to cost around a nickel
and it was sold at over double its current size, but now a candy bar
costs over $1.00 and is less then half the size it was during the
1920’s. Since 2002, the US dollar has steadily been losing value
compared to many other world currencies. Only during the deep financial
crisis of late 2008 did the world’s reserve currency begin to
head back up versus other currencies. This occurred despite the unprecedented
money printing of the Federal Reserve, government stimulus spending,
and of course the wide-scale corporate bailouts since many other economies
where considered in even more dangerous shape then the United States.
Large institutional money, government money, and high net worth individual
money began screaming back into the US dollar currency despite the
United States dire economic circumstances out of global economic fear.
It is our opinion that we are to resume the significant downtrend
in the US dollar in 2009. Inflation hedges such as gold, silver, and
commodities are an area this trend has us highly focused on. Where
will the world go if the US dollar is unseated as the world reserve
currency? A new global currency? Chinese Juan?
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