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2011 / Opinion Piece
Dance Near The Exit
Recently I read yet another article about the coming
"hyperinflation". Honestly the media tosses these terms
about like the unexpected arrival of the mother-in-law
banging on my door this weekend! Just a few months ago
it was stagflation and in 2009 it was deflation. For me
I prefer to turn up the music and dance near the exit.
media is filled with, too much "media" and a lot of people
spend far too much time listening to it, viewing it and
reading it. Don't get me wrong, it's important not to stick
your head in the sand like an ostrich or be like Alfred E
Newman and wear a T-shirt that says "What, Me Worry?".
(If you don't
know who Alfred E Newman is then my apologies)
The problem a lot
of people have is too much media. The media hypes on and on
about the coming "hyperinflation". A period in the coming
dark ages (perhaps tomorrow from what the media claims) when
we will walk around with a wheelbarrow of cash just to buy a
loaf of bread and the next day we will need more.
It was just
months ago that the media was talking about stagflation,
which is a situation in which inflation rates continue to
rise or are high but economic growth is low and unemployment
can remain stubbornly high. It's a tough period as
governments cannot rely on the "usual" course of action -
such as lowering interest rates, to stimulate the economy.
The 1970's saw stagflation in many developed economies,
including Canada and the United States.
But just 10
months earlier the media was endless chattering on and on
about deflation. Deflation is that period in time when there
is a general decrease in price levels of goods and services
and inflation falls below 0% or goes negative. Many
economists believe that disinflation leads to depressions
such as The Great Depression of the 1930's. However the
country of Japan appears to have been in a deflationary
period for 20 years but has remained the world's number two
economic power until just recently when China replaced
Japan. Many economists believe that the United States has
been in deflation since the terrorist attacks in September
The media banters on and on about
terms they have no real knowledge about as they fill up
their rapidly expanding 48 hours a day of airtime. They
bring on a string of economists and fortune tellers who
predict what will happen tomorrow and the media makes
everyone worry that on Monday we will have deflation, by
Wednesday stagflation and on the weekend hyperinflation will
arrive just when I want to fill up my van. (Should have
filled it on Monday)
The stock market
crash of 2008 to early 2009 scared a huge number of
investors both small and institutional. This was a credit
crisis which could have resulted in a depression far
exceeding the great depression. How it will all turn out in
the end no one can say for sure. Many of the problems seem
to have been put "on hold" through large cash infusions
around the world. But these cash infusions have just added
enormous amounts of debt to countries world wide. Debt
levels are so high I would question if anyone truly fathom's
the amount of capital indebted. It is definitely in the tens
if not hundreds of trillions of dollars.
Through all of
this mess many investors sold out in the crash and have stayed on the side lines,
earning next to nothing on their depleted capital and in
fact, actually losing capital every day that it is not
invested. My approach has been to turn down the noise from
the media, turn
up the music from the Federal Reserve and stay with the trend.
I know after 35
years of investing that there is rarely any point in
fighting the trend. Right now the Federal Reserve has been
pumping liquidity into risky assets and has been since the
credit crisis. After all what did people expect when it was
the Federal Reserve that expressed how they had contained
the credit crisis issue in the first place. What should they
do to avoid what could be the worst depression of any
generation in history? Is it better to kick the can down the
road and hope:
governments get their act together and realize they cannot
spend billions or dollars they do not "have".
governments do not get elected on the continual ticket of
lowering taxes even more, spending even more, which just
doesn't add up. Then they continue to be dishonest with citizens by not telling them you can't have
it all without paying for it.
governments finally realizing that this is not "free money",
but money "taxed" from its citizens which is supposed to be
used to improve the lives of all its citizens not a select
citizens realize the folly of entitlement; of such things as
paying into a retirement plan for 20 years - a plan based on
unrealistic returns on risky assets - and then expect to
retire on 60% or more of what they made when working.
E) citizens realize that they are not
nations onto themselves. They cannot continue to borrow way
beyond their means to repay, hoping their personal GDP will
catch up and surpass their borrowings.
F) citizens realize they must accept some responsibility for
their own finances and learn how to save a small amount
Perhaps if all
the above happens then somehow over the coming decades (and
I do believe decades - but remember this is just MY guess
from MY crystal ball) the debt issue will be whittled down.
But I digress.
Once the Federal
Reserve announced their intention to pump liquidity at an
unprecedented scale they basically sent out party
invitations to everyone. When I got my invitation I thought
it was obvious to everyone that risky
assets would rise in value, including commodities, stocks
and other currencies and this will create inflation. How
long inflation might last, or how high inflation can get is
anyone's guess and it is just that - guessing.
With so much debt
including personal as well as national, it is hard to say if
inflation can reach run away status. But what, me worry?
by the Fed was their invitation to their party. The Fed
wanted to inflate risky assets, they wanted inflation, they
wanted a lower US dollar and they want this party. When it
looked like the party was going to slow down last Spring, and many "guests"
started to go home, the Fed sent out more invitations to
QE2 - their second "add-on" party. Like a sequel to a great
movie, they coaxed everyone back to the party.
standing back and keeping my capital in a mattress trying to
prepare for the coming "hyperinflation" I felt in early 2009
when the Federal Reserve announced its "party", it was
better to "inflate" my capital, courtesy of the Fed. That
way I will have more of it, if inflation in its many forms,
arrives. By not investing since 2009 I would have lost
capital. It is obvious to me that the Fed wants people to get their capital back.
When people get their capital back they "feel better". When
they feel better, consumers have more confidence and they
spend. Remember after the crisis hit full blown in late
2008, the media was filled with economist who declared the
American consumer dead. Well that has yet to happen. The
consumer both in the USA and in Canada have been pretty
resilient if not downright stubborn.
Like all good
things, the Fed's party will eventually end, but by staying
at his party I am better prepared for whatever comes next.
Has the Fed's party worked? Well perhaps a bit, but the
warning signs are still with us. The housing market is still
terrible, some nations in Europe are basically bankrupt
although no one is labeling them as such, the debt levels are
now higher than in 2008, unemployment remains stubborn, but businesses
have had their best years in almost a decade and a half, and
many have refinanced their long term debt at incredibly low
the trick though will be to know when to
leave the party, before all the balloons burst and the
lights go out.
I have used the
strategy of "the
Cautious Bull" many times before, over the past 35
years. It served me well every time. It's a simple strategy
of closing when there is a profit and re-assessing before
putting the capital back at risk. Because every time my
capital is put into the market, whether it be stocks,
commodities, currencies, bonds - it is at risk.
I also keep 30%
of my capital in cash, 30% in laddered bonds and the
remaining 40% in riskier assets - stocks. By taking profits
as they develop, being realistic about the kinds of returns
I can make and staying away from penny stocks, venture
stocks, buy and hold forever strategies and the like, I have
found that most times I "can have my cake and eat it to."
While this time around, it may indeed
be different, I
still believe, party on, but I prefer to dance near the