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Updated @ 11:00 a.m. EST, Friday, November 28, 2008.


WELCOME TO TRUE CONTRARIAN! I will attempt to create an entertaining, readable, and hopefully refreshing viewpoint a few times each month. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence.

In July 2007, the media rejoiced that there was no possibility of higher inflation. In July 2008, the media insisted that rising inflation was the major threat to the global economy. By November 2008, the media proclaimed deep concern over deflation. The only accurate statement is that any nearly unanimous media conclusion is always dead wrong. --Steven Jon Kaplan

AS COMMODITY SHARES RISE, SO WILL INFLATION (November 28, 2008): After having been insistent upon the theme that inflation was the greatest risk to the worldwide economy as recently as July, the media have become equally obsessed with the theme of deflation in recent weeks. One analyst after another has been been telling you why prices will continue to decline because of a slowing global economy.

However, the prices of commodity shares are broadcasting an entirely different story. Gold mining shares, as measured by GDX, XAU, and HUI, have gained more than 60% from their opening prices on October 24, 2008. Coal mining shares, as measured by KOL, have risen by more than 40% from their lows just in the past week. Even oil shares have begun a significant rebound, as have the shares of agricultural producers. This commodity-share recovery has been dramatic and intense on a worldwide basis. Insiders in these sectors, who had been selling heavily earlier in 2008, have shown the highest ratio of buyers to sellers in recent weeks since the commodity boom began near the beginning of the decade.

Ignore what most analysts are saying and pay attention to what the financial markets are actually doing. While almost everyone is concerned about deflation, the real threat to the global economy is a sharp resurgence of inflation that could easily achieve two- or even three-decade highs by the second half of 2009 in many countries including the United States. The U.S. dollar index has begun to decline from its highest point since April 2006, confirming that the safe-haven deflationary scenario has already begun to reverse.

Concerted global central-bank rate cuts and massive stimulus packages around the world will inevitably cause a huge rise in inflationary pressures. Since these act with a delay of several months, a world in which instant gratification is expected enables few folks to appreciate what is going on. Imagine you are driving an automobile and you keep pushing the accelerator all the way to the floor, since you don't see any immediate impact from your actions. What you don't realize is that your gas pedal responds with a one-minute delay! A minute later, you're surging 200 miles per hour down the highway and you face an entirely new kind of danger.

A similar event is occurring with the global economy, although it will take several months instead of one minute. Investors and economists alike mostly believe that these all-time-record stimulus packages "aren't working", because they have had almost no visible impact during the past two months. By next summer, the world will realize that they succeeded all too well in reflating the worldwide financial markets. Interest rates on bank CDs and similar time deposits will surge to their highest levels since the early 1990s. The inflation genie will be out of the bottle and firmly in charge, and no one will know how to put her back.

  • Overview of Gold Mining Shares, updated substantially on November 9, 2008 to show precisely how precious metals shares have completed important six-year bottoms.
  • Learn more about Steven Jon Kaplan and watch a live interview on MarketWatch.
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    NOW IS THE TIME TO BUY LOW, ESPECIALLY COMMODITY SHARES (November 9, 2008): It is ironic that the investing public talks about buying low and selling high--but everyone instead likes to buy at multi-decade peaks and is afraid to buy at multi-decade lows. No wonder the vast majority of investors lose money in the stock market even with the strong long-term upward bias for global equities. Meanwhile, corporate insiders were heavy sellers a year ago, and have been equally aggressive buyers in recent weeks. It's hardly surprising that the rich get richer and the poor get poorer.

    The following statement is cynical but true: the financial markets exist to transfer money from the middle classes to the upper classes. Wealthy people train themselves to buy when the media and the public are most gloomy, and to sell when the prevailing sentiment is either euphoric (as in early 2000) or irrationally complacent (as in late 2007).

    Commodity shares in particular have rarely been more undervalued than they have been in recent weeks. Gold mining shares traded at the same levels in late October 2008 as when gold had been $328 per ounce in 2002. Energy shares traded at the same prices a couple of weeks ago as when crude oil was $28 per barrel in 2003. Every single major coal producer saw heavy insider buying by top executives during the past several weeks. Agricultural-commodity shares slumped to five- and six-year lows while the price/earnings ratios of many of these companies reached all-time nadirs.

    Numerous other major asset classes slumped to multi-year and even multi-decade bottoms. High-yield corporate bonds, or "junk bonds", plummeted to their lowest valuations since 1933--an amazing 75-year low. Convertible bonds, preferred shares, and similar groups also became absurdly oversold. Japan's Nikkei index fell to its lowest point since October 1982--not only marking a 26-year nadir, but showing a far more ridiculous undervaluation since corporate profits in Japan, especially for small companies, have soared since 1982. With global liquidity at a multi-decade low and hedge funds forced to dump assets left and right, profitability and rationality has been completely ignored.

    While global equity markets have been forming a bullish pattern of higher lows, the average investor feels emotionally that they are making lower lows. This is a classic sign of a major bottom and a strong buy signal.

    If there is any doubt about whether stock markets around the world will rebound sharply, all you have to do is look at a chart of TLT, which is a fund of U.S. Treasuries averaging 25 years to maturity. As a general rule, the vast majority of Treasury traders are the world's most knowledgeable global investors. TLT has been forming a bearish pattern of lower highs for several weeks, meaning that the smartest asset allocators are positioning themselves for an environment of global economic expansion and sharply higher inflation, along with a weaker U.S. dollar. This is the exact opposite of the media's insistence on "deflationary depression" that is as dead wrong as the media's bullish Goldilocks outlook on the stock market a year ago, or their equally foolish "buy commodities" mantra a half year ago.

    FINALLY, A SINCERE THANK YOU to Barron's for featuring me on page 50 of their November 19, 2007 issue, and then again on February 25, 2008 (page M14) and June 2, 2008 (page 41), as well as August 25, 2008 (page 32).

    CURRENT ASSET ALLOCATION (November 28, 2008): My own personal funds are currently allocated as follows: LONG POSITIONS: stable value fund (retirement fund with stable principal paying variable interest, currently 4.50%), 0%; MYJ, 2.5%; Gold mining funds GDX, ASA, BGEIX, INIVX, 40.5%; Japanese smallcap funds DFJ, SCJ, JSC, JOF, SPJSX, 12%; Coal mining fund KOL, 7%; Energy closed-end fund PEO, 7.7%; General-equity closed-end funds ADX, CET, 5.5%; VWEHX, 0.5%; VIDMX, 10.5%; VINIX, 1%; VIEIX, 1%; TRBCX, 1%; VZ, 1%; KRE, 1%; XRT, 0.5%; TRI, 1.7% (bought at a 15% discount); gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents including VMSXX and the PayPal money-market fund, 0.1%; SHORT POSITIONS: None; covered ALL of them in October 2008 which had amounted to just over half of my entire net worth.

    REMINISCENCE OF THE WEEK (November 28, 2008): When I was a teenager, I had a newspaper route for several years. I would wake up at exactly 4 a.m. every day to bundle Baltimore's "Morning Sun"; after riding my bike on the route, I would be finished shortly after 5 a.m. After having breakfast with my father who woke up each business day at five, I would usually go back to sleep for an hour before rising again to go to school. Since it was my responsibility to collect payments in addition to making deliveries, I made sure to deliver all papers on the porch instead of just tossing them carelessly in the general area of the driveway. I prided myself in being able to hit almost any exact spot from a long distance, and often collected some generous tips from customers.

    One afternoon shortly after I returned home from school, a fellow with a gruff voice called to complain that he hadn't received his newspaper on a particular morning two weeks earlier. I asked why it took him so long to notice, and he responded that he realized it immediately--but he had been very busy that month. I suggested that maybe he had simply forgotten, or that someone else had brought in the newspaper. He sounded certain, so I agreed to stop by to discuss it with him.

    When I first arrived, I stuck with my story that he must simply have misplaced it. However, out of the corner of my eye, I could see something in the bushes which to my peripheral vision appeared more and more like a yellowed copy of an old newspaper. I tried to avoid staring directly at it, while my argument became increasingly feeble as I realized he was right. Finally, I apologized profusely to the fellow, reimbursed him for the missing paper--and when I was sure that he was well inside his house, quickly retrieved the sun-faded Morning Sun out of the bushes and brought it home.

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