How to
Invest in this Global Crisis
December 9,
2009
Arnold Bock
Contributing Editor
PreciousMetalsWarrants
Current
Reality:
Virtually
all investors large or small, institutional or private,
sophisticated or clueless have managed to weather the
current tsunami in the financial markets. If they are
honest, however, most would admit to having taken at least a
haircut and a shave, if not a bath, from late September 2008
to the present.
The most
recent period would have left most of us down by perhaps
forty percent, or more.
If we go back to current cycle highs of over a year ago, the
financial destruction has likely been much greater and,
depending on which asset class we dined on, the loss
differential has been much greater or less than the average.
For example, I am a commodities aficionado which means I got
clobbered unmercifully.
We have all
met our respective personal financial Waterloo unless we
were sufficiently prescient to bail out somewhere along the
way and parked our precious stash of cash in US Treasuries
or money market funds. By virtue of significant recent USD
appreciation, that move not only would have preserved our
capital, but grown it significantly because of recent
substantial dollar appreciation. While interest income on
that cash would have been negligible, the recent decision by
the US Treasury department to raise and broaden Federal
Deposit Insurance Corporation (FDIC) deposit guarantees
would have provided a most satisfying sense of security.
Such wise
investors are now smugly perched on the financial sidelines
carefully examining which beaten up equities and other
investment products warrant their valuable and safe cash.
Indeed, targeted purchasing of high value, but beaten
down, equities at the present time will make these folks
much richer down the line, thereby transforming these
investors into icons whose opinions will be much sought
after.
Most of us
either were not that wise or lucky. We have been transformed
from persons who evaluated investments based on prospects
for capital appreciation and dividends into chastened
persons who find our highest priority is now the investment
which preserves what remains of our not so carefully
husbanded savings. We have lost so much in such a short
period that the option of whether to sell out or to wait it
out has foreclosed on us. Heck, with the market bottom
getting near, there doesn’t seem to be much sense in bailing
out now, is there?
Rather, we
watch CNBC’s perpetually positive talking heads and conclude
that happy investing days are clearly evident on the
financial horizon. On the other hand, if we read widely we
see facts are constantly marshaled to support all manner of
economic and financial opinion and forecast. Much of it
suggests that the largest installment of the economic, if
not the financial, Armageddon lies ahead.
So what is
an investor, who has been severely chastened, to do now?
The Period
Immediately Ahead:
Let’s
assume that a) the forced selling by leveraged hedge funds
and individuals is nearing its end, and b) year end selling
for tax loss reasons doesn’t have much longer to run either,
and c) a lot of cash is on the sidelines parked in
Treasuries and money market funds, and d) that the US dollar
has recently appreciated dramatically. There is no
compelling reason to believe it will rise any higher but
more likely dollar fundamentals will reassert themselves
shortly, causing the dollar to inevitably resume its
downward trend.
In other
words, the time seems ripe for a significant bear market
rally in equities.
Why not? Many agree that the markets have been oversold and
much value is present at these price levels. Surely value
investors like Warren Buffett have imitators and believers?
Early in 2009 we therefore should see significant and
sustained increases in the price of a broad cross section of
equities.
Will that
rally last and signal the end of declining share values?
Does a meaningful stock market rally mean the financial
markets are signaling that the economy and the recession
will be ending before too long? It is a fact that a rising
stock market is a leading indicator suggesting future
vitality in the economy. However, few believe the next
rally in the stock markets signals the end of the current
deepening recession. The damage to the real economy has
not yet begun in earnest. Until the pain of economic
recession is seriously reflected in rising unemployment,
lowered GDP and other negative measure of economic illness,
there is little prospect that an economic recovery is about
to begin.
So what is
an investor to do? Value investors should use the current
period to buy stocks with great fundamentals, superior
management and prospects at current prices. Such stocks
should be held rather than traded.
This is especially true with equities in the resource
sector since they have been beaten down to levels previously
unheard of. They are keepers whose quality should be
treasured. They will become star performers during the next
period of economic resurgence. Having spare cash to purchase
these gems and the patience to give them time to perform is
all that is required.
The other
action to take in the next rise in the equities market is to
use it as an opportunity to “ditch your dogs.”
Most of us
got stuck with some of these stinkers as the recent market
decline rushed past us to the downside and into the
trenches. We stood by motionless and unwilling to allow
ourselves to sell them. If we intend to right the wrong of
this missed opportunity, we must remain vigilant to take the
first opportunity to sell into a rising market.
Cash from
the sale of these mainly motionless equities with little
future potential, should be kept handy for the first
opportunity to acquire under priced high value gems in the
right sector. That time will arrive down the road simply
because no sustained rise in the markets will take place
until near the end of what is likely to be a deep and
elongated economic recession.
Because the
economy will continue to trend further into negative
territory, we should not be too quick to assume an end to
this growing recession. Once rooted, an economy caught in a
deepening and lengthening recession will not readily return
to health. Why is that?
The deeper
and longer the succession of bad news, a kind of self
reinforcing attitude develops among workers, investors and
the general populace. While the media is usually a potent
force for optimism in normal times, it can do the opposite
in times of turmoil. A constant parade of pictures and
voices exhibiting defeat could become the dominant theme. Of
course the facts depicting unemployment, shut downs,
layoffs, deficits, debt and statistics of all types setting
modern records on the downside is seriously depressing for
almost everyone.
Factors
Directly Affecting Your Investment Decisions:
I sense
that late 2009 or early 2010 will mark the trough or bottom
of this recession.
That is by no means a given, but it also likely portends the
economic recession could become an elongated “U” stretching
out in time from that point. Most of us will become
accustomed to a constant stream of bad news and will have
lost any residual sense of optimism. We may well have
hunkered down for the long term. Many will have caused
themselves to believe that the recession is the new norm...a
permanent condition.
Central
banks and governments everywhere will have been using the
same game plan for dealing with the problems of financial
institutions and the general economy. Words and terms like
rescue, bailout, assistance, help and stimulus will have
become common and vastly overused.
Money,
liquidity, reflation, credit will have become the unifying
theme...borrowing, lending, granting and creating it.
Little attention will have been given to raising taxes
simply because that would be considered a giant wet blanket
to a global economy showing only tentative signs of
recovery.
Instead,
money in various forms will be borrowed and then lent at
nominal interest, invested or given to any and all to stave
off insolvency and to stimulate demand. Interest rates will
continue to be set below prevailing inflation rates
justified on the grounds that all barriers to its use must
be lowered or removed. Moreover, deflation fears will
have totally replaced concerns about inflation. Asset
prices will continue to drop causing many to see parallels
to the Great Depression of the 1930’s and the most recent
fifteen years of Japan’s sputtering economy and financial
markets.
These
realities will become the primary justification for turning
up the flow of money, both borrowed and newly created.
Creation of money and its distribution in the forms of
bailouts and stimulus will be done with abandon for the
simple reason that central bankers and debtors become
paralyzed with fear at the prospect of deflation.
Politicians and governments generally will cheer them on as
if rooting for the home team. Voters will be conned because
they will see and hear news which universally endorses this
one way bet.
Of course
everyone who advocates unlimited money as the solution to
all and sundry financial and economic problems will do so
with equanimity. Why? Because it will seem as the correct
medicine du jour for the most serious of problems, and even
better, it will be done with impunity. In their minds
there will be absolutely no prospect of inflation on the
horizon. Nonsense!!
Do you
sense something familiar here? Remember that a primary cause
of the current recession was excessive credit and interest
rates lower than the prevailing rate of inflation. In other
words, the “easy money” which helped to precipitate this
crisis, is again being used to fix it. Let us dredge up
yet again Yogi Bera’s popular phrase, it is “déjà vu all
over again.”
The
inevitable result? Inflation leading to hyperinflation. That predictable consequence is what all investors must be most
conscious of. It is the guaranteed end result of flinging
money in unlimited quantities at all and sundry heading like
lemmings inexorably toward insolvency. Think GM, CitiBank,
AIG, Freddie Mac, Fanny Mae and the myriad of other
institutions “too big to fail” and who have impressive
political advocates and lobbies saying so. Unfortunately,
fixing the economy is every bit as much a political process
as a financial one.
Governments
everywhere are overextended. Accumulated Debt as a
percentage of their annual Gross Domestic Product (GDP) is
well beyond the sign post warning of imminent financial
crisis. Current US Debt is over $11 Trillion, twice the
level it was as recently as just eight years ago. The US
annual Budgetary Deficit is predicted to be in excess of $1
Trillion for the current year, three times what it was last
year. Add in another projected annual deficit of $1 Trillion
for what is called the Trade or Current Account Deficit.
However, as
terrible as a $12+ Trillion debt is, Unfunded Liabilities
are the ever present slow moving tsunami which few
politicians dare mention. This is an obligation, a commitment, a promise, a debt,
which is not counted in official statistics or in formal
budget reports. In private sector accounting it would not be
ignored because the rules demand that it be tabulated and
publicized. This number pretty much represents all of the
future obligations, sometimes called entitlements, to the
citizens for such items as Social Security and Medicare. The
respected President of the Dallas Branch of the Federal
Reserve Board, Richard Fisher, claims that this number now
totals $99.2 Trillion! That’s $99.2 Trillion, not
$9.92 Billion!
Assuming
this is a valid estimate of future obligations, it is
probable that the United States is insolvent. It
would be bankrupt if it was to be formally acknowledged.
This issue is crucial because money spent for the purpose of
fixing the current crisis in the financial sector and the
growing deterioration in the economy, is mainly additional
borrowed and newly printed money.
New digital
dollars dilute the money that already exists, thereby
devaluing all money.
In other words, money just does not buy as much as before.
Should we be concerned that the preferred fix for the
current crisis could make the patient’s condition even worse
in the future? Of course we should. Monetary inflation
is currently taking place with an unprecedented vengeance by
means of the FED doubling the amount in its till from $1
Trillion on Sept 24th at the start of this crisis, to $2
Trillion as I write. The Dallas FED suggests it will be $3
Trillion by year end. In 2009 the pace is guaranteed to
accelerate.
Not only
does the currency become devalued by monetary inflation, but
price inflation follows on its heels. While price
inflation is what most people think when they think of
inflation, the core cause of price inflation is monetary
inflation. Monetary inflation is the principal tool being
used by the FED and the Treasury department to fight the
current economic crisis. Is this a problem? You can place
your bets on the fact that it will become our future
reality.
All
investors must be alert to this monetary inflation and to
the sequence of negative consequences which will follow.
Smart investing will anticipate a devaluing currency and
price inflation over the immediate horizon. Asset price
deflation is only the current and temporary reality.
What Does
this Mean for my Investment Strategy?
Simple.
Considering the creation of unlimited digital dollars is
indeed guaranteed to be an ongoing process, inflation
leading to hyperinflation is the undeniable consequence.
That also means that an increasingly devalued dollar lies
ahead.
Inflation
and a devalued currency mean that investors should realize
that, in times of declining confidence, tangibles are the
investments of choice. The list is topped by precious metals both in the form of
the metals and mining stocks. Energy, agricultural
commodities and other key resources should also top your
list. Even the best of beaten down real estate should be
given serious consideration.
So if you
have cash now, start picking up some of the value gems which
have suffered price markdowns of as much as 80 percent.
Secondly, use the next bear market rally to dump your dogs.
Use the proceeds on pullbacks to buy value equities you have
been lusting after. They come in the form of stocks and long
term warrants in the resources sector.
If we do
this we will have salvaged much of the loss we currently
face. We will have also positioned ourselves to experience
fantastic capital appreciation and income on those new and
improved investments.
December 9,
2008
Arnold Bock - Contributing Editor
Mendoza, Argentina
Email:
support@preciousmetalswarrants.com
PreciousMetalsWarrants.com
Dudley
Baker is the owner and editor of Precious Metals Warrants.
Articles are written by Dudley Baker along with contributing
editors, Arnold Bock of Mendoza, Argentina and Lorimer
Wilson of Toronto, Canada. Precious Metals Warrants is a
market data service which provides investors with the
details on all natural resource companies with warrants
trading on the U. S. and Canadian Exchanges. We do the work
for you and provide you with the knowledge, trading tips and
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expressed herein are the express personal opinions of Dudley
Baker. Neither the information, nor the opinions expressed
should be construed as a solicitation to buy any securities
mentioned in this Service. Examples given are only intended
to make investors aware of the potential rewards of
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