Certain Wealth in Uncertain Times  ®

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COPYRIGHT © 2009  STANFORD WEALTH MANAGEMENT

         Our current recommendations are reserved for our subscribers, as they should be.  But to give you a sense of our viewpoint and our track record, we have included a couple dozen actual headline articles from the past 10 years of Investor’s Edge — to give you as in-depth a look as you’d like at both the contrary thinking that has led to our success and to provide a valuable perspective as you develop your own investment plan.

           Two articles from 2008 are on this page — but you may review other pages all the way to 1998 and 1999 when we sounded a warning about the lunacy of AMAZON’s out-of-sight price (which declined from over 100 to 12 after we panned it.) 

           There are no hot tips here — this is an archive, not a currently-recommended list — but by showing you a couple articles from each year we hope you’ll notice both a compelling strategy and what we consider Common Sense to an Uncommon Degree...

 

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           A sea change has taken place in the US and world markets this year.  Most people see the current pullback as an interruption in the pleasant dalliance of making money on borrowed money, whether on margin, from their home equity, by buying other essentials on credit cards, or whatever, as markets, US and foreign, went ever-skyward.  I’ve been out of sync with that group as I declared the onset of the bear in our October 2007 issue and have never wavered in that analysis. 

           Now that most others are in reluctant agreement that we are in a bear market, they are anxious to “get on with it.”  Their attitude by and large seems to be “let’s shake out the weak sisters, finish the bear, and go back to the much more enjoyable business of making money.”  The debate already seems to be focused on “in which month will the market turn?”

           I submit to you, however, that this is one of those rare turning points where the entire game has changed.  For those too young to have missed the markets of the 1960s and 1970s, these will be uncharted waters.  For those who hope to forget those days, it will be murky.  But for those willing to learn from the past, our way forward will be defined, if not always crystal-clear.  The dot-com bubble and the housing bubble are pikers — the bubble bursting is The Great Debt Bubble of the past quarter-century.  It’s bursting will create massive opportunities for the aware — and will wipe out fortunes for those who don’t understand the new rules.  This is a long-term problem that will change the investing landscape for years to come.

           Cheap credit was a drug foisted upon us by a Fed unwilling to take away the punch bowl.  Business people do not typically seek out unusually high and unsustainable levels of risk — but when the Fed aids and abets it, indeed, places you at a competitive disadvantage if you don’t avail yourself of it when all your competitors are doing so, you’d best go along.  Under Fed chairman Greenspan, this created the illusion of economic success when in reality it was nothing more than the drug of cheap borrowing. 

           As a result of all this spiked punch, it’s hangover time.  I believe there are massive debt inventories that must be liquidated and overcapacity in too many industries because easy money allowed rampant expansion in anticipation of rather than in response to increased demand.  In earlier times, this combination of easy money self-corrected when lenders got nervous.  After all, it was their money at stake.  But when it is the Fed and the Treasury fomenting it, what’s to be nervous about?  It’s the taxpayers’ money, so the bureaucrats have no skin in the game.

           We can print money (debasing our currency) and inject capital into the economy at a time when business and consumers are simply unable or unwilling to do so.  The current administration has signaled its willingness to leap in with our (taxpayer) dollars and save their cronies on Wall Street and in banking.  This doesn’t provide the necessary surgery for the patient, it only staunches the flow of blood — for awhile.  It reinforces, and even rewards, irresponsibility in corporations and in government. But to profit from this, we must do more than complain.  We must recognize that this first step is the harbinger of many more.  Having used this medicine once, the Fed and Treasury will use it again.  However, they cannot afford, politically or fiscally, to bail out any more old friends.   For that reason, I will continue to avoid, or short, big banks and brokers like CITICORP, BANK OF AMERICA, MERRILL LYNCH, LEHMAN BROS, and WASHINGTON MUTUAL. 

           There will be short-term rallies but, as Ralph Wanger noted, “There’s never just one cockroach in the kitchen.”  (Or, it seems, in the executive suite.)  The banks and brokers’ financial problems run deep.  I predict many more “disclosures” before either have turned the corner to real profitability based upon real assets and real earnings from conducting their real businesses instead of shilly-shallying around with Stuff Nobody Understands, Including the Inventors.

           Does this mean I am going to step aside for the next few years — that’s right, years it may take to unwind from this bacchanalia — and sit in cash?  No way!  I see two inevitable results of the unwinding of this lunacy.  That’s why the structure of our portfolios going forward the next year (or more) will rest upon two steel I-Beams:

           (1) Inflation, and

           (2) Infrastructure

           Try as I might, I can think of no way out of this mess that is not deflationary for the dollar and inflationary for the rest of us.  The usual catechism is that recessions stop inflation because people buy less.  But that only addresses the demand side of inflation.  The supply side comes from too many dollars out there  — and printing lots of dollars is what it will take to get us out of this mess sooner rather than later.  Today, even as the developed world labors under this credit kerfuffle, China, India, Brazil, , Russia, Indonesia, et al, will continue to move from bicycles to motor scooters to automobiles and from rice to fish to meat.  Food and energy prices may retreat from their current levels — temporarily, as they have in July — but they aren’t going into disinflationary territory!  And if I’m correct about my second I-Beam, we aren’t going to see serious drops in the prices for iron, steel, zinc, copper, asphalt, cement, timber, or any other building material, either.

           Most governments around the world need to invest, on behalf of their people, in serious infrastructure.  By infrastructure I mean everything from rebuilding military equipment that is worn down and used up to crumbling bridges, potholed roadways, decaying power transmission systems, and leaking-like-a-sieve water transmission and storage facilities.  These are BIG-ticket items that often transcend any one state’s or province’s bailiwick.  In the US. we would have to repair this collapsing infrastructure, anyway.  It’s better to let the Feds throw money at something worthwhile for a change, instead of to whatever the 47,000 registered lobbyists pay them to throw it at.  It will take a few years for the US economy to once again be healthy.  Since the markets are a leading, not a take at least another year.  I plan to make hay with the twin I-Beams during this time and assess the situation anew each day to see if there is meaningful change.

           Protecting what you have are the most important steps right now.  If I’m correct, the “throwing in of the towel” that I’ve spoken about in previous issues is likely to occur in 2008 and 2009.  People will increasingly stop saying impatiently, “Is this the bottom?  Should I buy financials and housing now?”  Still weaker retail sales, lower capital spending by industry, job losses, credit card defaults, and a shadowy sense of doom is the way most bear markets end.  They end with a whimper, not a cataclysmic down day during which we all sing “Happy Days are Here Again.”  If I’m correct, you won’t be fooled.  Investing in the I-Beams will have protected you.  See specific recommendations on the following pages… <  >

SAMPLE HEADLINE ARTICLES 2008

 

(Most recent articles first — Some are condensed to save space)

                 As I predicted last month the President, the Treasury Secretary,  the Fed Chairman and Congress (when they can take a moment from what they must believe is their Constitutionally-mandated obligation to investigate drug use in baseball while Rome, Washington DC, or Baghdad burns) are up in arms over The Recession.  The President proclaimed, “We’re not in a recession... We’re in a slowdown, and there’s a difference.”  Honored readers, I don’t care what you call it, but if it looks like a duck and it waddles like a duck and it quacks like a duck, it’s a duck. 

           Are we in a recession?  If...you are merely concerned about the effects of a recession like people losing their jobs because of declining sales at numerous companies; spiraling household debt that makes consumers reduce their spending; a US dollar that the administration wants to weaken in order to pay off the country’s mostly-foreign creditors with ever-more-worthless paper; the worst housing sales in 17 years; declining net worth in your pension plans, 401ks, IRAs, stock investments and your home; bonds rated AAA that are really BB; and a monthly paycheck that only covers you through the 25th of the month, then, yep, we’re feeling the effects of a recession.

           Another way of simplifying all this economist mumbo-jumbo is to use the analogy of household waste.  At it’s most benign, we all collect “stuff.”  When we collect it on our computer, we need to get rid of the detritus.  When we collect it physically, we need to donate it or have a yard sale.  Those are the more benign forms of waste collection (and None Dare Call Them Recession.)

           But when it comes to real trash — like moldy cheese, and the paper towels you used to clean up baby food spills, you need to remove the waste in order not to suffocate from an excess of trash in your own home.  At its worst, the reason you have a septic tank or sewer line is to get rid of the human waste that would otherwise remain in your home.

           The economy is no different.  Neither is the stock market.  Both need to have the trash taken out every Monday or Wednesday or whenever  — in the case of the economy and the stock market, make it every few years.  We hadn’t had a correction since 2002.  Did investors, economists, and pompous politicians believe that stock markets and economies can keep collecting trash forever without disposing of it?

           ...if you never take out the trash things get pretty smelly.  There is a natural cycle of boom and bust, of up-market and down-market, of good economy and not-so-good economy, of the 7 years of plenty followed by 7 years of famine described as far back as Genesis 41.  The excesses of the dot.com years were, of necessity, followed by the bear market of 2001 and 2002.  The bull market which followed came after the Federal Reserve repeatedly slashed interest rates so severely that the cheap credit carried the seeds of our current bear market.  It's time now to take out the trash of liar loans, ninja loans, speculation, brokerage firm greed, bank stupidity, and cheap money for buyout firms and hedge funds.  And it's also time to remove the human waste that's clogging the economic pipeline: the brokers and lenders who engaged in predatory lending practices, the Masters of the Universe who created $500 trillion in derivatives, the bankers who believed their legacy would be to boost earnings where no banker had gone before, and the Wall Street dealsters and greedsters who packaged the trashiest of the smelly trash, picked it up at the curb, and then rang your front door bell to sell it back to you with a pretty bow wrapped around it.

           As a student of market history, one of the most difficult jobs I have is to do my best to warn you in advance when I believe the market displays a propensity to enter a period of decline.  It's difficult because no one wants to hear that kind of "negativity" when the market is roaring.  The other difficult job I have is to provide a counterpoint to the negative news that will be omnipresent at the bottom of the bear market.  As I've said so many times (as recently as last month) bear markets are more intense but of lesser duration than bull markets.  In other words, this, too, shall pass.  And when it does, we'll be there to collect the treasures others discarded, wrongly thinking everything was trash...  <  >

March 2008

“WASTE REMOVAL & QUACKING DUCKS”

August 2008

 

“THE TWIN I-BEAMS OF

OUR FUTURE”