The second most important thing about investing for the next decade
Posted by Frugal on February 6th, 2008
Unfortunately, by the time when you read this, it could be already too late. At least, it is probably already too late for me because I might have lost one third of my total net worth, my in-the-money company stock options, without the possibility of recovering it ever (since mid-October of 2007).
So what is this second most important thing potentially about investing for the next decade? It is the BIG ROLLOVER discussed originally at MillionaireNowBook.blogspot.com. Larry was extremely gracious enough to grant me the permission of reprint here (I hope he still remembers that from an email exchange). He is a generous and wise person, and in times of uncertainty like this, I read his blog for advice in my thinking dungeon. In any case, you can see the full original text below.
In what can only be described as the largest unwinding of the excesses of the past 50 years, we are now facing what Nick Russo calls, “The Big Rollover”.
I first wrote about the THE END OF THE GRAND SUPERCYCLE? back in September of 2006 and re-posted it on November 22, 2007. In that post I described what the Big Rollover was and noted that it was to begin in mid-2008. Then, I listed various things one can do to survive the coming storm.
2008 is here and now Nick warns that we are facing the greatest trainwreck in history. He calls it a “period of cleansing” that will last 10-15 years as a corrective cycle.
He claims that CNBC is nothing more than “Infotainment”, because people want to know what happened yesterday and what’s happening right now. But, what they are missing is a repricing of the entire planet. Hard money is trump. The public is just waking up to that notion. Gold is the new copper and food is the new oil.
We must a approach this coming storm with a postive mindset. He doesn’t believe people are prepared to face this situation because:
Housing will not come back.
We don’t want to hear negative things.
We are (only) programmed to believe that everything will be ok (because they always have been after a crisis since WW2)
We don’t know how to handle a negative event.
We tend to think “In the end, someone will bail us out”.
This period of unwinding will be much more extreme than what we faced in the Great Depression. That’s because of credit and demographics. The fact that everything is highly leveraged will mean the unwinding will be excellerated on the way down.Deflation is the bread and butter for Treasury Bonds, both short-term and intermediate-term. But, the key will be timing. Rates will go up to defend the dollar. Tips (inflation protected bonds) will also become good places to “hide”.
All of this is happening in the 8th year of the bull market in commodities that, according to historical cycles, will run 9 years (every 30 years for the past 200 years) and end around 2010. (prior starts – 1911, 1941, 1971, 2001). Why isn’t gold at $1500 when it should be? I don’t know, but the big moves don’t happen overnight. Expect 80% of the move to happen in the last 20% (2 years) of the cycle. Expect gold and silver to continue up and with each Energy correction, view it as a time to step back in as we are in a global energy crisis.
Expect another shock to the system, such as an event like 9/11 which will push us faster into the rollover. Do things to protect yourself and cocoon yourself in order to ride it out. This means a couple of huge things to me: reduce debt everywhere in your life and create sources of income.
The higher stocks went up over the years the more shock it creates going down. And, with all the leveage in our financial lives, people simply don’t have the “cushion” for a prolonged downturn in the equity markets.
Personally, I have hedged my equity accounts and continue to write covered calls on long stocks. I own a long-short fund, many gold and silver mining stocks, some physical gold and silver, PHO, DBA, Precious Metals Mining funds, the Permanent Portfolio, short and intermediate taxable and tax-free funds. I also maintain about a 1/3 debt to real estate equity postion so that my RE income stream is all positive.
My own prediction is that there could be one last chance for selling out, IF the BIG ROLLOVER scenario is true. I believe that the markets will again top out early next year in 2009. Nick Russo was probably very close in its timing, landing the prediction right in a potential double-top in 2007 and 2009 (although I believe that the top in 2009 can be well below the top in 2007). Todd Harrison just compared the current stock market with 1998 and 2001, and possibly 1929. In my opinion, it’s none of the above, but possibly a mathematically combined charts of 1998 and 1929. The markets will probably fake even more bulls to come, as a combined chart of 1998 and 2001. Then it will roll over to 1929 style, except only in spirit (inflation-adjusted), not in (raw value) chart.
Boy, what a heavy topic to talk about. But just don’t say that I did not warn you. The coming months and years for the investment world will be painful, if not really painful. Deflation, and then hyper-inflation possibly in that particular order. Both scenarios will probably whack all possible investment that you can think of, if you don’t switch your investment strategy in time for either transition (since the investing strategies for those two scenarios are exactly the opposite, except maybe for the gold part). Yak!
And you can all give “thanks” to the “maestro” Greenspan for contributing to this cause.
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February 6th, 2008 at 5:35 am
You have my permission any time, Frugal.
At this time in the cycle, believing that things are changing as we speak and indeed real estate has been “cut back”, I remain content in my holdings but not on sitting on my hands. Therefore, I have created a very large (for me at least) income source.
I am underwriting large commercial loans as an independent contractor.
Thanks to the sudden and rapid drop in the Prime lending rate, and thanks to BofA heloc being under prime (as much as 75 bp) I am refinancing a rental condo here in Scottsdale (50% LTV)
With regards to my (class C) strip center refinancing has been impossible. 3 lenders say they like it and then half way through they disappear……
With regards to the stock market, I have been reducing long positions over time. Also, these bounces should be traded: double shorts in rallies and long calls when we have big dips. I continue to remain long mining stocks, but I also trade more around them. Example: I recently bought AAUK ar $22.99 when the market had that bad open two weeks ago and recently sold it at $29.30. Both pre-market. However, the Yahoo I recently sold (on the MSFT news) was at a serious loss from 1999…..
Reduce debt and increase sources of income.
What is the new mantra of gold bugs? Cut up your credit cards, don’t watch TV and vote out ALL the incumbents!
February 6th, 2008 at 1:20 pm
You have to think in the long term…especially for young people. Housing WILL come back, its just a matter of how long. As long as the population is growing, places that are suitable for inhabiting will always be in demand. Its true Greenspan/the fed made things much worse by straying from their #1 priority: slowing inflation.
February 7th, 2008 at 2:13 am
Larry,
Thanks for your generosity in sharing your wisdom. I always appreciate your inputs.
I’m trading more around mining shares too now. And yes, I love your voting out ALL incumbents!
I agreed with your market opinions. Bounces should be traded still. The bottom is just not in yet.
February 7th, 2008 at 2:24 am
Jesse,
I think you haven’t got what I tried to say.
Maybe after 10 to 15 years from now, you will.
The long term investing in stock market is only good for people with lifespan over 200 years. In that case, you can wait through any big cycles of up and down for over 50+ years.
It usually takes 20 years for a financial bubble to be completely over. Housing markets won’t be an exception. And this year is year #2, if I count the market top from 2006.
You must have heard about Tulip bubble. Have the price of tulip come back from the peak, inflation-adjusted? Sometimes, the answer is never, even after hundreds of years.
One must be open-minded to even the extreme views.
February 7th, 2008 at 6:10 am
Jesse,
you have to see that the credit bubble that is imploding is much like that in Japan in 1989. The Fed’s response is exactly like that of the Bank of Japan – lower rates and – hope – that banks will make enough money on expanded net interest margins (and maybe origination fees from refinancings) to offset the losses from the writedowns. This means, though, that best case, the banks will be writing down “assets” for years, because of the sea of bad paper they still carry.
The alternative is, of course, worse. If the write-downs grow too large, the banks will cut into their equity and their statutory capital, this will force them either to a) find new equity (which is what the biggest banks are doing by selling themselves to Singapore and Dubai) or b) reduce their balance sheets by selling assets and reducing tier 2 and 3 capital. At a minimum, this leads to equity dilution for the existing shareholders. Worse, it could push many smaller institutions into illiquidity and receivership.
The problem in Japan (and now in the US) is not only that the loans are now non-performing, but that the borrowers are no longer creditworthy, so there is no new financing activity (origination fees count for more than 1/2 of a large bank’s profits).
When you talk about the “long term” it is worth noting that investments made in the Nikkei stocks or in Japanese real estate in 1988 and 1989 (20 YEARS ago) are still worth a fraction of the amount invested.
Higher taxes and an older population, increasingly unable to live alone, will lead both to lower consumer activity, LESS not more need for housing (which already exceeds demand by over 10 million vacant units when rental units are factored in) and an insistence by investors on higher yields (i.e. lower prices relative to income).
This is going to be very, very bad. Efforts to blunt it have actually exacerbated the problem. History has shown that asset price bubbles, particularly highly-leveraged asset price bubbles, leave extremely long down cycles in their wake.
February 7th, 2008 at 7:31 am
I don’t really buy in to this. If all this was so predictable, it would have been predicted last time. There are so many millions of factors that 1 set of analysis can’t explain it all.
I’d rather go on ignoring stuff like this and continue broad investing and hope everything works out.
February 7th, 2008 at 12:50 pm
Good grief….you are taking advice from Larry N.? I’ll stick with his brother’s (Random Rodger) advice, which is a bit more realistic and sensible.
February 7th, 2008 at 5:25 pm
Advice Joey? I am refinancing a condo in Scottsdale. Did that notation constitute advice? If so, re-fi on.
February 8th, 2008 at 8:18 am
Predictable? At any time, there are always all kinds of views from the most bearish to the most bullish, with various percentages of people believing in those views.
And of course, you will need to decide on your own, and invest accordingly.