One of my early on subscribers wrote me last week with his thoughts on the current economic situation as he sees it and how he has positioned his portfolio to ride out the financial storm that he sees brewing on the horizon. It is so out there, so well argued, so well composed I share it with you in its entirety.
"I have put all of my eggs in one basket - commodities. In fact only two commodities - precious metals and energy with the bulk being in precious metals. These are diversified only in that they span bullion, geography and the range of very large to the very early stage junior exploration companies. A third of my investments are in (the warrants of) individual stocks, many of them juniors and two thirds are mutual funds which invest in a range of precious metals stocks.
Why do I put my eggs in only one basket? From my perspective the economic and political risks on the US and global horizon are so serious that my priority and best bet to PRESERVE my equity, and to SECONDARILY GROW it, is to invest in precious metals and energy. (Other sectors are either overpriced by historical standards) and/or highly vulnerable - DOW, S&P, bonds and real estate. In other words the downside risk of gold, energy and base metals is far less than the alternatives.
What will cause the system to implode, explode or go off on some tangent such as deflation or hyperinflation? A lot of events and circumstances (could) be the trigger, but I also think central bankers (will) continue to play for time along with their cheerleaders in the brokerage, corporate and banking sectors. It will probably be a sudden factor triggering others such as a leveraged hedge fund collapse, Israeli military hits on the nuclear capacity of Iran or a terrorist sinking of a petrol ship coming through Hormuz or Malacca straits. It will definitely cause currency gyrations and imbalances which will all cause public opinion and confidence to shrink dramatically. It is that last component which is the genuine ugly part for which manipulation by the power brokers will be ineffective to counteract.
When? I think the later part of this year will be more prone than early on. The point I want to make is that there is virtually nothing on the economic and political horizon to tell me that anyone is changing course. The US with all of its current policies, practices and scary economic and financial realities continues to operate as if it is business as usual. Moreover, there is absolutely nothing in terms of facts to suggest to me that the system will get better.
Remember that politicians only have a time horizon spanning to the next election - 6 years for Senators, 4 for the President and 2 for Congressmen. Keep in mind this is the maximum time horizon with the calendar always shortening. Their goal to is to be reelected, not raise waves, always bribe the voter with their own money and never ever tell the ignorant, TV sotted masses, or the fifty percent who actually vote, the ugly truth because they are sure to turn on the messenger.
Denial always trumps an acceptance of the truth even when one is endorsing a system designed to leave one's kids with bad values and worse circumstances than we have now. The public will always opt for the pleasure of the moment rather than deny themselves for a better future for themselves or their kids. Proof is the rate at which houses have been refinanced to enhance current living standards and lifestyle. It wasn't too long ago that people denied themselves in order to double monthly mortgage payments to become mortgage free as soon as possible. Notice too the fact we now have negative personal savings for the first time. Check too the rate at which employees use their registered retirement income tax savings entitlements and you will see that only half contribute to their defined contribution pension plans and most of those who do never come close to using their entire head room entitlement. And how about the fact that the amount in the 401k account of the average 50 to 55 year old employee is $10,000 little greenbacks. Guess how far will that get the average retiree?
So how do I end this rant? Economic and political realities are grim and getting worse. There is no evidence of any serious and realistic policy initiatives. If there were the public would reject them because it would invariably entail sacrifice and deferral of an enhanced lifestyle until some unspecified future date. So my best advice is to batten down the hatches, preserve one's equity and exploit opportunities that will emerge even in a sickly economy. Remember, many people hatched their future fortunes by judicious acquisitions in the 1930's when everyone else seemed to be in dire straights."