We're running out of metaphors
There’s an argument for being contrarian, and a solid one. A true contrarian would have emerged from the recent housing crisis not only unscathed, but rich. In its simplest incarnation, contrarianism means exactly what it sounds like: buy when everyone else is selling, and vice versa.
The reason this doesn’t work when you follow it to the letter is that it means you would have sold Google stock when the rest of the world was pushing it up from $100 to $579; and you would have bought GM stock when everyone else was jumping off, anywhere from $72 down to its eventual delisting. Over the course of the stock market’s history, you would have lost money.
A popular hypothesis is that of the “permanent bull market”, which states that any downturn in the market, however long, is but temporary. Accounting for inflation, the Dow is well ahead of where it was when it started and it always will be over any given period if you just wait long enough. Therefore, just wait long enough.
The problem is that humans have life expectancies on the order of only a few boom-and-bust cycles. Generalities don’t really help when formulating an investment strategy. Yes, you can figure out which stocks to buy by analyzing fundamentals – in fact, we recommend it because we can get you started for a mere $3.50 – but even that implies that there’s a future worth investing in.
Not to go completely nihilistic on you, but ask yourself the following questions. Seriously. Don’t just read them, think about the answers.
- Is there a particular number the Dow could rise to that would give you confidence in the American economy?
- If so, what’s that number?
- When do you realistically think we’ll get there?
- (And did you factor in inflation?)
I recently asked the president of a publicly traded foreign company this very set of questions. Conducted orally, so he couldn’t see which one was coming next. Here were his answers:
- Yes
- 13,000
- (hesitating) 2013? Maybe 2014.
- (more hesitation)
Crossing your fingers and trying to convince yourself that things can only get better is better than being pessimistic, it would seem, but eventually you have to start quantifying things and weighing your situation against inflexible time horizons. Us each getting a year older every 12 months is the only constant. What the economy does is, of course, variable.
The following are not opinions:
America’s credit rating now at its lowest level ever, on par with Belgium’s.
If the Greek or Irish economy tanks, the damage can be somewhat contained. Not so for the country with by far the world’s largest GDP.
With a few notable exceptions, no member of either party in the United States government’s legislative or executive branches is remotely serious about reducing its size (and therefore reducing the size of its current and future obligations.)
Those same government functionaries have all but stated that their goal is to eliminate risk, which is a functional impossibility. Of course, the buzzwords they use are far more benign (“keep Americans in their homes”, “make the rich pay their fair share”, “put America back to work” et al.)
People are at least finally learning how to save.
(Ha! Just kidding. It’s true that that’s not an opinion, but it is a falsehood. People are borrowing more than they have in years.)
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The consensus opinion among the populace seems to be to wait and see. But an enterprising contrarian can’t decide to simply do the opposite of nothing.
At Control Your Cash we try to keep away from giving specific investment advice. Not because we’re not professionals, but because our M.O. has always been to teach people to fish. That being said, it’s time to champion hard assets.
Real estate is finite. With a growing population, it would seem that real estate’s value will always increase in the broadest of terms. (People need to live and conduct business somewhere.) Gold and other precious metals are finite, at least until alchemy makes a comeback.
“But technically, everything is finite”, you argue. Which would be true if we’re restricting our discussion to the tangible. But there is literally no limit to the money a worrisome government can create. If you don’t believe that, or think it’s an overreaction, go ask a Zimbabwean. Or a Weimar-era German, if there are any left.
Inflation isn’t just a devaluing of the currency. It’s a way to punish the poor at the expense of the rich (because rich people, almost by definition, keep a smaller ratio of their wealth in cash than poor people do. Rich folks can buy assets and hold onto them. Those whose wealth consists primarily of cash aren’t just too tempted to spend it, they’re too subject to the machinations of a market that conducts business in weakening dollars.)
Sooner or later, a government with overwhelming obligations and too many creditors will have no choice but to employ the nuclear option: if you owe lots of dollars, it makes sense to make each dollar you owe worth less. If you can do it, that is. You can’t. Governments can. And shortly, will.
**This article is featured in the Yakezie Carnival-September 11th, 10th Anniversary Edition**
