Great Depression Online Archive Issue:

Nowhere Left to Hide

Great Depression Online
Long Beach, CA
March 03, 2009

Inside This Issue You Will Discover…

*** Lowering Expectations
*** In the Dead of Winter
*** Nowhere Left to Hide
*** And More

“The economy will be in shambles throughout 2009 – and for that matter, probably well beyond.” – Warren Buffett, February 27, 2009

Lowering Expectations

“Right now we’re in the period of maximum recession stress, where the big cuts are being made,” was how economist Ken Mayland, president of ClearView Economics, put it to AP last Friday.

He was commenting on the rapidly shrinking economy and, in particular, the latest Commerce Department report showing that the “economy contracted at a staggering 6.2 percent pace at the end of 2008, the worst showing in a quarter-century.”

Moreover the reported 6.2 percent contraction had been revised downward from “the 3.8 percent annualized drop for the October-December quarter first estimated last month.  It also was considerably weaker than the 5.4 percent annualized decline economists expected.”

~~~~~~The Money Vault~~~~~~

Former Elitist Wall Street Insider Pulls Back the Curtain…  And Reveals How Average Investors Can Make Quick Profits that Put the Insiders to Shame.  He might be a very successful investor, but you’ll never see him on CNN.  Learn all about it here: The Money Vault

~~~~~~~~~~~~~~~~~~~~~~~~~

In other words, when the numbers were finally crunched, contorted, and fabricated, they were well worse than what was estimated or expected.  Thus, with this economy’s continued decline, there’s only one logical thing to do…lower one’s expectations.

In the Dead of Winter

But like the late Hunter S. Thompson once noted: “Myths and legends die hard in America.”  And after more than two decades of a historically long, broad, and steep economic and financial boom, the myth of unending wealth and eternal profits for all is dying hard.  So too is the legend of the millionaire-next-door, who got rich buying and holding an S&P500 Index fund.

Following yesterday’s freefall, the S&P500 sits at a 12-year low.  So for those clever, practical, and enlightened enough to have bought the market in 1997…for their troubles, and their time, they have nothing to show.  And if you factor inflation into the zero percent nominal return – using the Bureau of Labor Statics inflation calculator – you get a real return of minus 24 percent.

We don’t like to see they guy next door lose money.  Nor do we like to see the retirement plans of millions of Americans ravaged by the market.  What we’ve always been aghast and astonished by is that they were founded on myths and legends to begin with.  That somehow the stock market could give you something for nothing.

We remember a purveyor of mutual funds becoming spectacularly irate with us in early 2000 because we questioned the prudence of the buy-and-hold investment strategy.  Sure we can’t predict the future…and we do not attempt to trade the market by timing short term movement in stocks or indexes…but buying and holding stocks always seemed so mindless and foolish.

Doesn’t it make sense to recognize and have the patience to exploit some simple…but pervasive…movements and patterns to markets and the credit cycle?  That when interest rates have been coming down for 20-years and stocks have been going up for that same time, at some point – as it always has in the past – the trend would reverse…and interest rates would go up while stocks go down.

While we cannot predict the stock market, we can at least attempt to recognize where we are in the market and credit cycle, and position our assets accordingly.  While there may be sunny days in winter, there will be more in summer.  Conversely, while there may be rainy days in summer, there will be more in the winter.  At the moment we’d consider this to be the dead of winter…with another six or eight years to go before the beginning of the next big bull market run.

Nowhere Left to Hide

Currently stocks are going down, but interest rates have hardly budged.  We take this as an indication of the level of investor fear, of government intervention, and of the kindness of foreign investors in U.S. government debt.

Inside the annual letter to shareholders of Berkshire Hathaway released last Thursday, Chairman of the Board, Warren Buffet had the following remark: “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s.  But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”

Thus far, through the stock market crash and economic depression, holding U.S. Treasury bonds has made for a nifty little investment.  As stock portfolios have been cut in half, breaking even – or a bit more – with Treasury bonds has been a slick move.  But going forward we have some reservations.

To date all the stimulus, bailouts, and liquidity pumped into the economy courtesy of the government and Federal Reserve hasn’t done a lick for the economy.  However, that’s not what we’re worried about.  What alarms us, rather, is the very prospect that it could work.  That this unprecedented quantity of new money will gain some traction in the economy…that it will very rapidly gain too much traction.

When that happens interest rates will spike up, along with inflation, and stocks will be punished yet again.  That’s right.  When the great U.S. Treasury bond bubble finally pops, there will be nowhere left to hide…except for, perhaps, gold. 

Or, if you’ve got a little imagination, you could short 30-year Treasuries by buying the Rydex Inverse Government Long Bond Strategy Fund.  In fact, it trades on the NASDAQ under the ticker symbol: RYJUX.  As government debt wanes, and interest rates rise, you’ll be rewarded while traditional Treasury investors are ruined.

Just an idea, of course.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  As the financial crisis and economy progress, more and more traditional investments are taking it square on the chin.  And as we noted in today’s issue…U.S. Treasury bonds may be next.  If you found the RYJUX idea to be of interest, then you should really read this letter from our friend Jim Davidson.  He’s put together loads of ways to safeguard your money while also offering opportunities for significant upside gains.  Learn more here: Crisis Strategy Alert

 

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