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Jul 31 2013

Specific Investing Strategies – 2013 onwards

The global economy since 2008 has begun the process of de-leveraging based on the end of a major debt super-cycle . Central banks have been printing money on a historic scale and interest rates are likely to stay near zero for  the next 10 years as well. Return of capital will be challenging let alone return on capital. First of all some context for what the investing environment will be like for the next 10+ years of a global recession.

 

Immanent Global Headwinds:

  1. Europe in recession for the next 5-10+ years; major european bank fails
  2. US Deficit Issue; Fiscal cliff
  3. Japan Debt Issue
  4. China probable hard landing
  5. Middle east conflict leading to higher oil prices

Structural Issues:

  1. Debt/Deleveraging in all devleoped ecnomies
  2. Globalization and a near infinite source of cheap labor putting global pressure downwards on wages
  3. Technological Productivity (Robotics/Software) replacing the need for humans
  4. Demographics in developed economies, aging population more dependent on gov’t

 

Inflationary Deflation: Seymour Pierce’s Thunder Road report notes that:

“Central banks are creating the ultimate bubble in money itself, as they fight the downward leg in this Long Wave cycle. This is the biggest debt bubble in history. Each time deflationary forces re-assert themselves, offsetting inflationary forces (monetary stimulus in some form) have to be correspondingly more aggressive to keep systemic failure at bay. The avoidance of a typical deflationary resolution of this Long Wave is incubating a coming wave of inflation. This will not be the conventional “demand pull” inflation understood by most economists. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system , with a new reserve currency replacing the dollar. This makes gold and silver the “go-to” assets for capital preservation.

Strategically, we are far more bullish on equities versus bonds. Tactically, equities face a volatile period – buffeted by alternating cycles of deflationary and re-flationary forces until they overcome bonds as the inflationary endgame unfolds. In that scenario, equity investments should (over time) be aligned with the growing share of real disposable income directed towards essential expenditures, including energy, food/agriculture, personal & household care, mobile telephony and defense (for governments).

The “Inflationary Deflation” paradox refers to the rise in price of almost everything in conventional money and simultaneous fall in terms of gold.” (source)

 

Prominent Investor advice:

John Mauldin

  • Gold as Central bank Insurance
  • Farm Funds, Agriculture
  • Sit on the side with Cash
  • Long 20-year Trade Us Treasuries (not as investment)
  • Short the Yen, Long Japanese companies; robotic companies…in US dollars
  • Managed Futures
  • Alternative Investment, hedge funds
  • Specific strong stocks, that deal w/ future
  • Income producing assets…apartments, etc.

Barry Ritholtz

  • If going into slowdown – no exposure to energy, price of oil plummets; especially so in south america
  • Environment for dividends is better outside USA; more attractive rates also ETF’s; non-european- non bank entities, Asia, south america middle east Africa,
  • For more riskier strat – telecom south Asia Africa, energy after recession, manufacturing

Marc Faber

  • Asset Allocation: 25% Gold, 25% equities, 25% corproate bonds & cash, 25% real estate
  • Thinks South east Asia (Vietnam, Thailand, Cambodia, etc) will be the best place for growth over the next 10 years; also Ukraine & China near term
  • South East Asia has a population close to 400 million
  • In a Disaster scenario – Own Properties & Farmland for protection purposes; some equities and avoid sovereign bonds; A large portion in Gold, to protect against central bank crazy printing
  • Don’t hold cash long term, the US gov’t will print like crazy; US cash short term is least dirty shirt
  • interest on soveriegn bonds will increase soon as market catches wind of unsustianable gov’t debt; therefore equities over sovereign bonds
  • could see a collpase in gold as a major deflationary crises grips the world…mid-long termish
  • Thinks there is a massive commodity bubble created by the US Fed in China, which would cause a hard landing there
  • However war in the middle east could send commodity prices even higher…

Felix Zulauf

  • No to gov’t bonds for the next 10 years due to probable currency collapses
  • Yes to high quality corporate bonds

Garry Shilling

  • Risk off trade – aspect
  • Long Treasuries; bull on 30-yr tresuries.since 1981..because further appreciation, deflation, weak global economy, safe haven; thinks they will go down @ 2.7% now, thinks it will go down to 2%, dosnet care what yield is, as long as its going down; capital appreciaiton of 16% on a 30-year 0-coupon from 2.7->2;
  • Out of Stocks, or you short them…prospects of lower earnings…global recession
  • Short Commodities….hard landing china, global commodoity from 2011 decliing
  • Long the US Dollar…because it is the ulitmate safe haven, cleanest dirty shirt

Richard Yamarone

  • Be in cash
  • 10-year US Treasuries

Mohamed El-Erian

  • 5-7 year US Treasuries is the Sweet Spot
  • 10-yr range bound between 1.5 and 2
  • 30-yr…dangerous, inflationary concerns, credit concerns

Bill Gross

  • Commodities like Oil and Gold
  • U.S. Inflation-Protected Bonds
  • High-Quality Municipal Bonds
  • Non-Dollar Emerging-Market Stocks

James Bianco

  • Thinks there is a bubble in the corporate bond market
  • 30-yr treasury has outperformed the s&p 500 over the last 30 years
  • 70% correlation between a stocks movement and the s&p 500 index

Robert Prechter

  • Cash or Cash Equivalency to buy equities when market bottoms soon
  • Counting on cash rising in value, gov’ts defaulting/deflating rather than hyperprinting/inflating (ex.greece)
  • large amounts of debts denominated in US $, will be defaulted on
  • Also unemployment going to 50%…therefore making inflationary scenario more difficult
  • demand for jobs = demand for dollars
  • NO to real estate, commodities, bonds

Jim Rogers

  • All currencies will devalue with non-stop money printing
  • The best (least worst) currency to hold is the Russian Ruble
  • Bullish on Agriculture in terms of Commodiites
  • Long-term bullish on Asia, long term-bearish United States

 

My personal take:

Worst case scenario: Global currency reset, cash value goes to zero, all assets decline in value 75%+

Best case scenario: Debt Jubillee

Even under a best case scenario, unemployment will continue to rise across developed nations and income will continue to fall. This is due to the systemic effect of globalization namely outsourcing and robotic advancement. First world nations will become poorer. In that case investing in things like the basic necessities would be most prudent. Governments will insure people’s survival and basic needs are met.

  • Low-Income rental properties (apartments, condos)
  • Discount retailers: Wal-mart, etc.
  • Agriculture – Farm funds, Food, Grocery stores
  • Utility companies (as opposed to energy companies), Electricity generators
  • Super flexible multi-national corporations with a large presence in emerging economies that focus on base necessities
  • Sadly & ironically major banks deemed too big-to-fail