So where are we in the big picture? I have gone back and read my own articles from last Fall. So far, the picture painted by Austrian thinking and long cycle adherents has been quite accurate. A course has been charted by gleaning tidbits and insights from articles, websites and financial forums and by then integrating the perspectives of the best and brightest. So how accurate has this course been? Have the underlying fundamental perspectives been validated? A review of the strategic premise of these articles is in order.
Cycles and Trends
The long cycle is intact; however a strong secondary wave is becoming increasingly manifest (Are We Rich Yet?, 11/3/02). The primary economic and social trend being down, but a partial recovery in financial asset prices holds sway with the masses. This recovery is supported by action of the monetary authorities. Policy has even extended to support economic warfare against the Euro Block (False Dawn, 3/7/03). Competitive currency devaluation being the most recent manifestation of this policy as the US clearly intends to export deflation to France and Germany as a reward for their position on Iraq. (Refault, 5/10/03). So following the basic strategy of building a bearish position over 2 to 3 years continues to make sense. Using the secondary trend to determine entry and exit points also makes sense, but the timing can be difficult at best. So dollar cost averaging into this position remains an effective tool.
Long Term Gold Strategy
Gold and its shares remain the cornerstone for just such a portfolio. Shares, being a derivative of gold, are a means to an end. That is, at the bottom of the cycle, the bulk of a precious metal portfolio should be rotated from shares to physical gold. If this cycle extends for several more years, as most K-wave adherents expect, then the financial dislocations will be severe, and physical gold in possession will be very important to your financial viability. Gold share certificates in possession for debt free non hedged mines with physical gold in possession would be protected from, say, brokerage insolvency. It is inevitable that there will be more than one investment banking catastrophe. It would be tragic to be dead right, and have a nicely structured gold share portfolio somehow compromised. So longer term, if you plan to hold shares in an account, even a retirement account, it may make sense to "take delivery" of a portion of your share position over the next few years. Or at least do your homework on the solvency of your investment banker. And diversify among accounts. Avoid the derivative kings, such as the House of Morgan, like the plague.
Silver in the Mix
A decent portion of a precious metal position in silver is becoming increasingly important, as the long term viability of currencies, even as a medium of exchange, becomes increasingly suspect. A silver position is quite risky, as it can behave as industrial sludge and trend down with the economy. Conversely a modicum of investment interest could push this market up dramatically. So watch the mainstream press for mention of silver in a monetary capacity. This concept has been circulating among leading contrarians for a fair time, but is becoming more acceptable to the less radical thinkers in this camp. And the camp is growing. Continued expansion of this thinking, driven by continued loss of confidence in currencies, will be a leading indicator of an emerging silver bull. Only a small monetary component attributed to silver by Mr. Market would cause dramatic price increases. As the potential depth of the Kondratieff winter becomes more apparent and tangible, building a position in silver makes increasing sense for both the debt slave and the elites (Red Shields, 5/26/03).
Mother of All GSEs
My expectation that the Fed will monetize GSE debt (Personal Central Banking, 1/23/03) moved one step closer to reality this week with the scandal at Freddie. A convergence of forces, namely the opaque derivatives position of the GSEs together with a weak dollar, drives this expectation (Housing Cover Clause, 6/3/02). Recent appointments of derivatives kings at the helm of the US Treasury and Fannie Mae are also telling (False Dawn, 3/7/03). This has been punctuated by this week's news about rushing the former manager of the House of Morgan's derivatives group into his oversight role for Fannie and Freddie. After all, their solution to insolvency has been merger: Look at the roll-up of derivatives leveraged low grade debt entities into the House of Morgan over the past couple of years. Looks like the players with the requisite experience are in place for the final act.
Commentary in the public arena about the GSE's by the likes of Greenspan and Buffet has only solidified my opinions. The air play of this commentary is infusing the precursors for public acceptance of this "necessity." Where the housing and monetary institutions must consolidate to save your mortgage, your dollar, and the American dream. Or create a nightmare. After all the Fed is just the mother of all government sponsored enterprises. This is arguably the largest financial bubble in history. And history has shown that the bigger the bubble, the more the government itself, regardless of its political form, is drawn into the bubble. I guess we are going for a record. And the mother of all GSEs will be at the center of the bubble during its last stages. An incestuous construct at best, and overtly fascist at worst.
This may well be one of the largest financial gambits in history. Born of necessity and driven by a lust for power. So will "they" pull it off? A nearly completely collectivist society engineered by our monetary authorities and would-be political masters? Or will a free market society emerge in which economic fundamentals re-assert their driving force? Where the law of the jungle prevails and creeping vines and crawling creatures obscure the edifice of our monetary temples.
The answers to these questions should guide our personal financial decisions, but so much is unknowable. Most likely, there will be several whipsaws in the process. A system in disequilibrium will exhibit increasing oscillations, until one of the oscillations throws us into another state of affairs. Where the excesses are quashed and a new equilibrium can be established. Then the oscillations damp out. That will be nice. This should coincide with the bottom of the K-wave in several years time. In the meantime, the secondary cycles will be sufficiently perverse to challenge both the bull and the bear. Deflating financial assets wherever they accumulate.
Since the long cycle is carrying us downward in social organization, the long term core position remains bearish with a cornerstone of gold and mortar of silver. But currently the secondary trend is still up and the false dawn could play out until some unforeseen event causes reflation efforts to unwind, or take an unexpected course. The stock market rebound is a bit overdone by most all fundamental measures. But bubbles can be very persistent, and nearly always persist longer than those who see them expect. And shorter than expected for those who live inside the bubbles.
What could be the reversal mechanism? The pundits have offered many possibilities: Job deflation in America erodes the housing market; foreign government sales of US debt accelerate, pushing interest rates upward, creating an interest rate derivatives train wreck; a run on the dollar and a rush to gold by foreign investors; a terrorist nuke. Quite likely that several, or all, of these scenarios play out over the next several years. Or something completely unexpected. Like SARS. Each coinciding with a downward swing in the secondary cycle as superimposed upon the primary trend.
What has been most interesting since I began writing on these articles is the accelerating pace of change. At first the obvious outcomes that I gleaned from various sources usually took several months to trickle up into mainstream thinking or to become so blatant that they could not be ignored. It now happens much, much faster. Either my sources of information are less astute, or the frequency of the secondary waves is increasing. Or both. So it is important to know your limitations. And acknowledge that trying to time the secondary cycle with a large portion of your assets will lead to doom. At some point you will be wrong, and the perversity of the market will become painfully obvious. Increasing caution is the prudent path to follow as the Kondratieff Winter progresses.
So unwinding real estate "futures positions" seems prudent to me. Since prices in my local market have dropped year on year, I am implementing the next phase on my personal real estate strategy: Am selling one home, taking the profits and paying for the other (Tiny Bubbles, 12/9/02). I will be renting in the blue zone, and owning in the red zone (Red Shift, 5/19/03). Now I am only owned by one house. Instead of two houses and the banksters. So will I miss a blow off in the real estate market? Quite likely. After all I missed the last year of the stock bubble by getting out too early. But it is extremely difficult to time a blow off, especially in somewhat illiquid assets. And especially with an accelerating rate of change. Wasn't it David Rockefeller that attributed his investment success to getting out 20% too early? But then, I don't think he was talking about his family castle.
But the Rockefellers and their like have survived these cycles. So no reason us debt slaves can't survive as well. Even escape bondage and prosper. But prosperity presumes the re-emergence of fundamental principles of economics. And political sanity. And if there is one thing in life of which I am certain, is that sanity will prevail, and that the basis of a free society will re-emerge. Even, if in the extreme, a fascist utopia is created by a faction of the elites, the nuclear terrorist or similar compensatory process will destroy it. And the jungle will prevail. So I pray for and watch for wisdom in high places. For new-Jacksonian thinking to rise to the forefront, dampen the cycles, and guide our policies back toward the equilibrium point so clearly seen by our founding fathers. Before freedom truly translates to nothing left to lose.