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.

If you're on a highway and Road Runner goes beep-beep,
Just step aside, or you might end up in a heap.
--Barbara Cameron, "The Road Runner Show" theme song, 1962.

RESPECT THE APPARENTLY IRRATIONAL DELAY (November 18, 2010): There were some wonderful cartoons I watched as a kid, where "Wile E. Coyote" chased after "Road Runner" around the top of a deep canyon. Road Runner hid behind a bush, but Wile E. Coyote didn't notice and kept running--right off a cliff. However, Wile E. Coyote didn't immediately fall; he continued in a straight horizontal line into thin air. Only when he looked down, and noticed that there was nothing holding him up, did he plummet to the bottom of the canyon. This is exactly how the financial markets behaved following the U.S. Federal Reserve's quantitative-easing announcement on November 3, 2010. The U.S. dollar began a strong rally less than 20 hours later, and continued to gain until it achieved its highest level since September 28--but the financial markets continued merrily along as though nothing had happened. Assets like silver and the Nasdaq 100 Trust (QQQQ) accelerated even more sharply higher when the U.S. dollar started rallying, than they had done while the greenback was slumping. Finally, equities and commodities and other risk assets looked down and noticed that it was just thin air below, and began to rapidly decline. Interestingly, when this process was occurring, most analysts either ignored the rising U.S. dollar index, or else said something ridiculous like "the fact that gold and silver can continue to rally in the face of a stronger U.S. dollar shows how incredibly powerful its bull market truly is". It always surprises me how few investors recognize that the financial markets repeatedly behave like Wile E. Coyote, following proven correlations over and over again--but usually only after an apparently irrational delay. It is the rare investor who respects and learns how to maximize the value of this delay. My personal strategy is as follows: the greater the number of divergences which indicate an impending reversal, the more aggressively I will add to my positions. I usually do this by placing the rungs in my ladders of orders closer together than they had been before the reversals had been so pronounced.

DO AS TOP CORPORATE INSIDERS DO, ESPECIALLY AT EXTREMES (November 8, 2010): Top corporate insiders worldwide have been selling shares at their fastest pace relative to insider buying since the second half of 2007 in many countries including the United States, and at an all-time record pace in many countries including India. Numerous subsectors, in the U.S. and elsewhere, have also seen record ratios of insider selling to insider buying. Those insiders who have the best track records with their trading have been among the most aggressive sellers. Regardless of the reasons, which are unimportant anyhow, they know that QE2 and all other government attempts to manipulate the economy will come to naught. More importantly, they recognize the dangerous overvaluations not only for equities around the globe, but also for real-estate prices.

While the housing bubble in the United States received some attention in 2005-2006, it was peanuts compared with today's real-estate bubbles around the world. U.S. housing prices reached just over twice fair value before they began a plunge which will surely continue for at least a few more years. At that time, the total value of U.S. residential real estate to GDP was at 1.8. Today, this ratio is 3.5 times GDP in China, 3.3 times GDP in Australia, 3.2 times GDP in New Zealand, 3.1 times GDP in the United Kingdom, and at similarly dangerous levels in numerous other countries including India, Canada, Indonesia, Brazil, Malaysia, Singapore, Colombia, Peru, Chile, and in other nations far too numerous to list here. If you rent out the average house in China today, your annualized rent will be equal to only 2.5% of the price of the house, versus a historic average of 7.5% in China and elsewhere for centuries (or millennia). This means that Chinese prices are at three times fair value. If you want to see what happens when a housing bubble at three times fair value collapses, as it inevitably must, then all you have to do is take a trip to Dublin, Ireland and look around.

Especially since the global real-estate and equity bubbles have been ignored or even cheered as allegedly bullish for the stock market, for commodities, and practically everything else, the opposite must inevitably occur. Just as we saw in the United States when the housing bubble burst especially in areas including Florida, Arizona, and Nevada in recent years, a surge in foreclosures will lead to all sorts of economic ills. The recent extreme bullishness toward equities and commodities must therefore lead to a dramatic pullback for these and virtually all other risk assets over the next two years, as we begin a global bear market which will rival and perhaps surpass the 2007-2009 bear market in terms of intensity and magnitude.

The problems in the global economy have not gone away during the powerful bull-market surge which began near the end of August 2010; it's just that you don't hear about bad news whenever risk assets are rising in price. Europe has a worse debt crisis than ever. Unemployment around the world has begun a multi-year increase which will persist for several more years. In every past era of stagnation dating back to the late 1700s, the dividend yield on any major basket of U.S. largecap equities has exceeded 6.0%; it reached only 3.5% at its highest point in early March 2009. While the last decade has been a very poor one for equity performance around the world, the next decade will likely be even worse as numerous pricing excesses have to be unwound and massive new borrowing has to be deleveraged.

One of the few beneficiaries of the global bear market for risk assets through 2012 will be a powerful surge in the value of the U.S. dollar. While almost everyone has been incredibly negative toward the greenback, the U.S. dollar index has completed yet another higher low in a bullish pattern dating back more than 2-1/2 years. On March 16, 2008, the U.S. dollar index bottomed at 70.698. Since then, it made a higher low on July 15, 2008 at 71.314; another higher low on November 25, 2009 at 74.170, and perhaps yet another higher low on November 4, 2010 at 75.631. As the greenback likely accelerates its uptrend and probably eventually achieves a nine-year peak, this will put substantial downward pressure not only on obvious assets which correlate negatively with the U.S. dollar, such as gold and silver, but also on high-yield corporate bonds, emerging-market equities, and virtually all of the favorite amateur investment choices of the past year. While everyone is looking up and asking when we're going to reach the sky, look down toward the solid ground.

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