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Updated @ 4:00 p.m. EST, Monday, February 16, 2009.


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.

Rising inflation and coming out of global recession will both be major financial events in 2009. But inflation will be the story of the year, since its powerful resurgence will be as much of a surprise to most investors as the stock-market collapse had been in 2008. --Steven Jon Kaplan

WHEN THE FINANCIAL MARKETS ARE MOST VOLATILE, GREAT TIMING IS NOT NECESSARY, BUT COMMON SENSE IS (February 16, 2009): During the 2007-2008 bear market, even if you had terrible timing and decided to sell short or to buy U.S. Treasuries many months after the turning point, you still enjoyed substantial profits. For example, those who didn't sell short until the late summer of 2008 still enjoyed double-digit gains when global equities subsequently collapsed. Those who sold short closer to the highs in 2007 or who covered their positions near the exact lows in the fourth quarter of course profited the most, but as long as you realized that too many complacent investors inevitably implied a major plunge, even poor timing was sufficient to gain 20% or 30% by the end of 2008.

The exact same principle is true in 2009, but in exact reverse. With so many amateur investors choosing to reduce risk AFTER a collapse, which is completely ridiculous, the financial markets are certain to surge sharply higher to punish their ill-advised decisions. Even if you are months off with your buying and selling, you will gain at least 20% or 30% this year as we experience the strongest short-term bull market in decades. If you buy commodity-related funds such as GDX, KOL, FCG, PEO, and RSX, which will likely more than double before the end of 2009, then you will enjoy even more substantial gains. That is because rising inflation will be an even more compelling story in 2009 than increasing growth.

If you need "proof" that this rally will occur, consider the 18-year high in the ratio of insider buying to insider selling since October. Or look at how U.S. Treasuries and other government bonds worldwide have collapsed in recent weeks: the trillions of dollars which have come out of these safe-haven assets don't have many places to go. With money-market funds and other time deposits paying less than the inflation rate in virtually every country, the stock market will be the investment of choice if only by default.

It has always been true in the financial markets that you should sell when prospects are brightest, and buy when the outlook is gloomiest. In late 2007 and early 2008, one constantly heard about the Goldilocks economy, without many reminding you that in the children's tale, Goldilocks is always followed by the three bears! Now that Baby Bear, Mama Bear, and Papa Bear have had their respective turns on the financial stage, with GDP growth projections more negative than at any time in several decades, this represents an incredible buying opportunity for equities around the world.

  • 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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    BUY NOW, BEFORE YOUR FRIENDS AND FAMILY JUMP IN (January 19, 2009): The global equity markets have been forming an important bullish pattern of higher lows over the past two months, while indices of implied volatility including VXO and VIX have been forming a pattern of lower highs since they had surged to 21-year peaks in the fourth quarter of 2008. Whenever this has happened in the past, a powerful worldwide stock-market rally has always ensued.

    Most analysts have remained relentless in their forecast of a "deflationary depression", which is completely at odds with the facts on the ground.

    GDX, a fund of gold mining shares which is my largest holding (see "current asset allocation" below), has nearly doubled from its bottom of October 24, 2008. If we were really going to have deflation, then the sector which responds most strongly to inflationary fears would not have surged so sharply during the past three months.

    Insider buying of commodity-related shares in the fourth quarter of 2008 was the most pronounced in many commodity-share subsectors since the early 1990s. If we were really going to have deflation, then top executives of commodity-producing companies would not have been so aggressively purchasing their own shares. Remember that these same executives were aggressively selling in the spring of 2008, when everyone wanted to buy them at all-time peaks.

    Exactly 1-1/2 years ago, there was a nearly unanimous consensus that inflation would remain at multi-decade lows--and then we had the strongest inflationary surge in eighteen years. Exactly a half year ago, almost all analysts agreed that inflation would continue to be the world's biggest economic problem--and then we had the greatest year-over-year drop in inflation since 1931. Now deflation is all the rage--and will be proven just as wrong as the previous two consensus opinions on this topic. You can consistently conclude that inflation will do exactly the opposite of whatever is the current trendy outlook.

    Even many bearish analysts agree that stock markets worldwide are undervalued, while bullish analysts are afraid to go on record as saying "buy now". They're going to turn bullish as soon as the market surges another 20% or so, which will encourage momentum players, hedge funds, chart slaves, and much of the public to start buying stocks again.

    An all-time record amount of money is currently sitting in risk-free time deposits including U.S. Treasuries and money-market funds, while concerted central-bank rate cuts have caused these deposits to continue to lose money relative to inflation. People will not tolerate negative real returns indefinitely. They are just waiting for others to jump in before they do. Financial analysts don't mind being wrong--they could hardly have been more misguided than they were in 2008--as long as they're wrong along with the vast majority of their peers. Misery may not love company, but it helps to avoid lawsuits.

    Fear of losing money will transform itself into fear of missing out on the rally that everyone else will be enjoying. Buy now, before hedge funds and the general public realize what is going on.

    Bearish analysts are confident about the S&P 500 soon going below 750. Bullish analysts are desperately hoping against hope for 1000. With too many investors gloomy and equity fund flows having been net negative since early October, the markets will surge far above these overly pessimistic forecasts. The S&P 500 will likely regain the 1300 level in the second half of 2009 which it has not touched on an intraday basis since September 2, 2008.

    Be bold, especially on any down day. Act early. Profit enormously.

    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 (fully marked to market on February 16, 2009): My own personal funds are currently allocated as follows: LONG POSITIONS: Gold mining funds GDX, ASA, BGEIX, INIVX, 43.0%; Japanese smallcap funds DFJ, SCJ, JSC, JOF, SPJSX, 10.0%; Global equity fund VIDMX, 10.0%; Coal mining fund KOL, 7.5%; Energy closed-end fund PEO, 6.8%; General-equity closed-end funds ADX, CET, 4.8%; Russian fund RSX, 2.5%; High-yield BB corporate bond fund VWEHX, 1.7%; Municipal bond fund MYJ, 1.3%; Natural-gas fund FCG, 0.5%; VINIX, 0.5%; VIEIX, 0.5%; TRBCX, 0.5%; VZ, 0.6%; TBT, 0.5%; KRE, 0.4%; XRT, 0.3%; USO, 0.9%; UNG, 0.4%; TRI, 1.7% (bought at a 15% discount); gold and silver coins and related metals collectibles, 4.7%; other collectibles, 0.4%; Vanguard Municipal Money Market Fund VMSXX, 0.3%; Putnam Stable Value Fund (retirement fund with stable principal paying variable interest), 0.2%; 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 (February 16, 2009): In August 2003, my wife and I were traveling through one of our favorite U.S. states--which name I will intentionally not mention here. We were in transit from one bed-and-breakfast inn to another, and decided to stop in a local pizza place for supper. The front door was closed, but we heard lots of voices near the back, so we walked around and found a massive pizza-making operation in full swing. The setup was completely informal, as though they weren't expecting any customers. We spoke with one of the workers who was taking a break, and discovered that this establishment had built up quite a nationwide reputation; they mail-ordered thousands of their brand-name pizzas all over the country each week. We watched as the dozen or so workers, all in their late teens and early 20s, formed an elaborate assembly line: throwing the dough into the air; forming the pizzas; putting sauces and other goodies on them; running to put the pizzas into their boxes for shipping; and other highly kinetic activities. Everyone was generally laughing, sometimes cursing, and otherwise appearing to enjoy a wonderful time. I was astonished that with their being constantly in motion, they did not tire out more easily.

    I walked over toward the lively assembly line, and commented to someone that they seemed to get along amazingly well with each other. This statement was followed at first by complete silence, and then by hilarious laughter which seemed far out of proportion to my remark. A short while later, they huddled in the corner for what looked like a brief private conference, after which they gradually became as animated as they had been at the beginning. Our meal was delicious, and I made sure to thank them profusely before we left.

    When we arrived at our inn, the proprietress asked us where we had eaten dinner. We told her, and her eyes opened wide. "You mean they're still serving over there?" she exclaimed, rather surprised. "Sure," I responded. "We had to go around back to get in. They didn't have any formal tables set up, but when they saw us, they found a couple of chairs and an old bench, and brought us a pizza with tap water on the side." "I guess you don't know the story," she sighed. "Last summer, one of the young workers was shot and killed in back of the place, a couple of hundred yards away from the building. They never figured out who did it, but they lost their license to operate as a local restaurant. They only do mail orders these days; the internet has really helped them stay in business. You must have been the first people to eat a sit-down meal there since last year. The local newspapers still mention the incident every now and then, but everyone figures it's just one of those cases which will probably always remain unsolved."

  • Best of Previous Reminiscences
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