A true contrarian look at investing and at life in general.
WELCOME TO TRUE CONTRARIAN! I will attempt to create an entertaining, readable, and hopefully refreshing viewpoint from time to time. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence. Those who believe in this investment philosophy should subscribe to my daily update service which I began in February 2006.
BERNANKE'S GRAND DELUSION (January 24, 2010): Ben Bernanke is convinced that if he had been alive in 1929, he would have been able to entirely prevent the Great Depression, and he is attempting to prove that by doing over the past couple of years what he would have done eight decades earlier. Unfortunately (or fortunately, depending upon your point of view), he is going to discover that he can only make a minor impact on the financial markets--and not at all in the way he had anticipated. He cannot possibly affect the rate of unemployment over the next decade, or the rate of U.S. economic growth. He can moderately increase the intensity to which inflation will surge higher later in this decade, and he is in fact doing exactly that without even realizing the consequences of his actions.
Even if all of the world's governments got together and reached a unanimous decision about how to proceed to "save" the financial markets, the future is already cast--not in stone, perhaps, but in very thick mud. We are on the verge of a major worldwide equity bear market. Even with the high degree of global economic coordination and synchronized stimulus that currently exists, nothing can have a significant impact on the future since even a well-capitalized, well-connected, and well-organized organization cannot overcome the pattern of proven economic cycles which has existed for thousands of years, and which will continue to exist for many more thousands of years assuming that humans continue to exist on this planet.
The combination of the giddy prosperity at the end of the twentieth century and the housing bubble from the beginning of this century can only be resolved through a typical era of stagnation. While the current era of stagnation which began in March 2000 will almost surely be worse than 1966-1982, it will probably be quite a bit less severe than 1929-1949 which included the Great Depression, and it will also likely be less severe than the worst stagnation eras of the 19th century. In other words, we are living through your typical, garden-variety stagnation. There's nothing special about it; if we all lived to be 500 years of age, then it would be "same old, same old" and we would sit around talking about how it was 1873 all over again. However, since we have shorter lifespans and almost no one even knows about previous eras of stagnation except for the Great Depression itself--which is treated as a form of extinct species like a Tyrannosaurus Rex--then we act as if we were the first generation in history to have to struggle with the problems which exist today. While much has of course changed in society, culture, and science through the millennia, the current era of stagnation would have been familiar to everyone from Julius Caesar to Ulysses S. Grant. If most of today's investors think that today's economic climate is unique or unusual, then they simply have either not studied economic history or fell asleep in class.
Those like Ben Bernanke who are intimately familiar with financial history, but who believe that if they had lived in 1870 or 1930 then it would have turned out entirely differently, are living a delusional existence. In the Book of Genesis, Joseph is able to accurately forecast an upcoming severe era of stagnation, but is not so foolish or arrogant to think he can prevent it. Instead, Joseph takes the correct actions during the previous era of prosperity to essentially perform the equivalent of selling short equities and buying U.S. Treasuries, so that Egypt prospers enormously when stagnation arrives. In contrast, the rest of the world suffers from its refusal to recognize proven historic patterns, which even then had no doubt already been well established. If Bernanke thinks he can outdo Joseph, then the next decade will determine his proper place in history. If Bernanke is still being compared with anyone named Joseph in 2020, then it will be the Joseph who encouraged his Jonestown followers to drink lethal kool-aid.
If everyone in your neighborhood were to max out on all of their credit cards, then it would certainly appear to be a flourishing place. However, problems would simply be delayed rather than prevented. Governments can spend as much money as they want; they cannot alter the inevitable course of financial history. While this may seem like a gloomy prognosis, it is actually a cheerful one since it accepts the world as it really is rather than attempting to create a tooth-fairy outlook which cannot possibly come true. If we think that "we have learned the lessons of the Great Depression", as Bernanke has repeated on many occasions, then we will be unprepared for another decade of generally rising unemployment and declining asset valuations, and we will suffer accordingly. If we at least know generally what will happen over the next decade or two regarding real estate, the stock market, inflation, and everything else, then we can adjust to it most intelligently to maximize our prosperity and minimize pain. Most unhappiness comes not from unpleasant events which are known in advance, but from unexpected ones which come as a surprise. Choosing delusion over reality only makes the inevitable arrival of reality that much more difficult to accept.
A TWO-YEAR EQUITY BEAR MARKET HAS PROBABLY BEGUN (January 24, 2010): From January 6, 2010 through January 13, 2010, I sold nearly all of my equities and equity funds in anticipation of what may be the most severe global equity bear market since the Great Depression--even when compared with the 57.7% plunge for the S&P 500 from October 11, 2007 through March 6, 2009. I bought a modest quantity of TLT, a fund of U.S. Treasuries averaging 25 years to maturity which was one of the top-performing funds during the second half of 2008. Most of my money is currently in cash and its equivalents. I believe the current bear market will persist for another 1-1/2 to 2-1/2 years.
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 January 24, 2010):
My own personal funds are currently allocated as follows:
U.S. Treasury fund TLT, 9.0%;
Volatility fund VXX (my only losing position), 8.9%;
Claymore natural gas futures fund CYMGF/GAS-T (Toronto), 7.6%;
Coins and related collectibles, 5.4%;
Thomson-Reuters TRI, 0.6% (sold most of my position on January 6, 2010 near 33.61);
Vanguard Municipal Money Market Fund VMSXX and other cash equivalents, 47.6%;
Putnam Stable Value Fund (retirement fund with stable principal paying variable interest), 20.9%;
Gold mining funds GDX, ASA, BGEIX, INIVX, 0.0% (GDX mostly sold at 50.12-50.17 on January 11, 2010, some sold at the open at 49.48 on January 12, 2010, average gain 81%; ASA sold at 80.00 on January 12, 2010, average gain 100%);
Coal mining fund KOL, 0.0% (sold near 40 on January 6, 2010; 8th-best mutual fund in 2009, average gain 212%);
Russian fund RSX, 0.0% (sold near 33.25 on January 6, 2010; 11th-best mutual fund in 2009, average gain 202%);
Natural gas producers' fund FCG, 0.0% (sold slightly below 19 on January 6, 2010, average gain 81%);
High-yield BB corporate bond fund VWEHX, 0.0% (sold on January 6, 2010, average gain 48%);
Japanese smallcap funds DFJ, SCJ, JSC, JOF, SPJSX, 0.0% (sold on January 6, 2010, with JOF at 7.58, average gain 28%);
Energy closed-end fund PEO, 0.0% (sold on January 6, 2010);
General equity closed-end funds ADX, CET, 0.0% (sold on January 6, 2010);
Crude-oil futures fund USO, 0.0% (sold on January 6, 2010);
None; covered ALL of them in October 2008 which had amounted to just over half of my entire net worth.
REMINISCENCE OF THE WEEK (January 24, 2010): A few years ago, I took a business/personal trip to Toronto, a city which I have visited perhaps a dozen times because I have many relatives who live there. One Saturday morning when I had some free time, I decided to go jogging for a little over an hour. After running past a zoo and a cemetery, I found myself in a neighborhood of charming, relatively small historic houses with the sign "Welcome to Old Cabbagetown". The place looked vaguely familiar, so I figured perhaps I had briefly driven through the area at one time while on the way to someplace else. I ran down one street which looked more unusual than the others, even though it appeared to be a dead end; this led to an even more interesting block and yet another dead end. I looked up and saw the sign "Alpha Avenue". This suddenly triggered an event from two decades earlier which had become completely forgotten in my conscious memory.
In 1986, I visited Toronto with my girlfriend; we stayed at a bed and breakfast in Cabbagetown for several days. In that pre-internet era, it was more of a challenge to find landmarks in any part of the world. We had a book about Toronto which was wonderfully written, but which frustratingly had no maps whatsoever. While we were able to find most of the places in the book which sounded worthwhile, one place remained tantalizingly elusive throughout our trip: Alpha Avenue. For more than a year afterward, whenever we were unable to accomplish something, one of us would say that it was like trying to find Alpha Avenue. It became a metaphor for our relationship. After we broke up, the whole episode somehow vanished from my mind until I went for a jog 20 years later. It's odd how our memories can trick us in unexpected ways.
(c) 1996-2010 Steven Jon Kaplan Your comments are always welcome.