Posted by: Steve | August 11, 2010

Is The Stock Market Too Expensive?…

By now, many of my listeners and readers are familiar with the intellectual challenge, exhilaration, exasperation and confusion in my line of work – this devilish work which I embrace most wholeheartedly. When I try to make sense of my friend and nemesis, the market – there are six-metrics I can turn to. With the help of Jacob Wolinsky, I present them to you.

1. P/ E-TTM Ratio which is the market’s index price (P) divided by its earnings per share for the past or trailing twelve months (E-TTM.) This ratio is currently at 18.3 for the market as a whole – slightly higher than the 17.2 reading last month and suggests the market may be slightly overvalued.

2. P/E-10 Year Ratio uses average earnings per share over the past 10 years to smooth out fluctuations due to unexpected events such as say 9/11. This ratio is currently at 20.5 and indicates that the market may be overvalued.

3. Dividend Yield is the ratio of the S&P 500’s annual dividends to its index price. The average dividend yield for stocks is currently at 1.99%, lower than 2.13% from last month.

Dividend Ratios have shown to be an unreliable indicator of market valuations, but we keep an eye on them anyway.

4. Price / Book-Value (P/BV) currently averages 2.09, marginally below the 2.11 This is well below the 30-year average of 2.41 for the S&P 500 – suggesting that the market may be slightly undervalued.

Note: Legendary investor Martin Whitman believes P/BV is a better measure of value than P/E because book values are harder to fudge than earnings, and are less affected by near-term economic cycles.

5. Total Market Capitalization / GDP ratio currently stands at 78.7%, higher than 73.4% last month. This ratio has historically ranged between 35% in 1982 and 148% in 2000.

Note: Warren Buffett believes that this ratio is “probably the best single measure of where valuations stand at any given moment” and investing website, GuruFocus, predicts that based on current levels for this ratio, the market should return about 6.5% in the coming year.

6. Tobin’s Q is the ratio of market capitalization to the replacement value of all of the company’s assets. Q is currently at 0.98 compared to 0.92 last month and an average of 0.72 over the past several decades. Some estimate that the market may be over-valued by 39% based on Tobin’s Q.

To recap, the measures are mixed.  3 suggest over-valuation, 1 fair-value and 1 undervalued.

Based on my decades of experience analyzing such valuation ratios, I believe the market is moderately overvalued at current levels. These levels would suggest single digit market performance over the next 5-7 years, and predict that returns will at least meet or beat inflation, but not offer the high returns we have come to expect.

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Posted by: Steve | August 4, 2010

Which Way is Up?…

 

     Click Here To Listen…

As an Investment Advisor, I am wrapped-up in the daily ups and downs of the stock and bond markets, or am worrying about inflation, deflation or just “flation” – either “in” or “de” or “stag” or “re.”

I constantly ponder questions like “What types of stocks will do better – large companies, small companies, domestic or international?” And “What direction are the markets headed in?”
 
For some silly reason, I always think that most Americans are thinking about this stuff too. I forget that this is what I do for a living and that most people don’t think about this very much. And they shouldn’t.

Most people get their financial news by catching snippets from newspapers, websites, radio, watching guys like Jim Cramer on CNBC at the gym, or by listening to my show or reading my blog (hint, hint – blog.slpomeranz.com.)
 
Technical Analysis

So, while I have your attention, allow me to acquaint you with two “technical” views on where the market is headed.

By the way, Technical Analysis is simply looking for patterns and trends in financial data to glean “insights” – really just guesses – on where the markets may be headed next.

Truth is, no one really knows where the markets are headed. But markets do trade on technical analysis – sort of like the tail wagging the dog – making some of it a self-fulfilling prophecy, till some cataclysmic “real” event washes away all theories. Sort of like the dot-com bust or the mortgage market collapse where reality ultimately trumps theory.
 
Two Technical Views on Market Direction

The two technical analysts I follow are Lowry onDemand and Hedgeye.
 
On the one hand, Lowry sees bullish patterns in the data. Here’s an excerpt from last Friday’s market commentary:

“… any period of weakness should probably be viewed as an opportunity to add to equity positions.  Investors might find this a good time to look for stocks with strong technical ratings in strong sectors and groups.”

You can sense that Lowry does not believe we are headed for another nasty downturn.

Hedgeye doesn’t agree. While Hedgeye analyzes technicals, they also closely follow the state of the US and world economies. Here’s the gist, in my words, of what Hedgeye principal analyst, Howard Penney, sees:

“… a weakening labor market, softening consumer confidence, softening housing activity and retail sales, and an intensifying trade deficit – the early stages of a renewed economic decline.”

Summary

While Lowry sees no near-term threats, Hedgeye believes another downturn is just around the corner. So there you have it, diametrically opposite views from fairly intelligent people. Welcome to my hell!
 
The bottom-line is, how important are their predictions for the short-term? The answer is: not very… because short-term market movements are not all that important.

The point is, many companies will create wealth over time so maintaining the assets you have in the market and adding during market dips should suit you well.

By the way, most money managers and so-called stock market experts fare no better than you when it comes to picking winning stocks. So listen to all commentators with a grain of salt. We may sound confident, like we know what the future holds, but alas we do not!
 
Building a portfolio based on trying to foretell the future will always lead to disaster. Generally speaking, buy good quality stocks, diversify, and let it ride.

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Posted by: Steve | July 29, 2010

WHO ADVISES THE ADVISOR?…

Click Here To Listen…

 

 Have You Ever Wondered Who Advises The Advisor?
 Here Are The Latest Thoughts From One Of My “Gurus”.

A Fearful, Yet Speculative Market:

Last quarter, Jeremy Grantham, head of GMO LLC., engaged in what he called the forecaster’s last resort, suggesting three main routes for the market and the economy.

The least likely route was the “everything is for the best in the best of all possible worlds” scenario.
 
“In this encouraging world, the economic recovery would be…. consistently better than expected. It would be, in short, the type of very strong recovery that normally follows a very severe wipeout. And one that was additionally helped along by unprecedented stimulus”.

He admits that last quarter’s poor market performance has not been encouraging for this goldilocks scenario, causing him to assign a low probability to this possibility.

The most probable major theme, to which he gives a 50% probability, would be a “reluctantly and irregularly recovering economy with interest rates staying at rock-bottom for the next 18 months or longer”.

These low rates, along with the market’s awareness that today’s Federal Reserve will still have to save the economy if things go bad, could continue to create a long, steady incentive to borrow and speculate.

His key point is: While the economy responds reluctantly to low rates, the stock market responds with much more enthusiasm-leading aggressive hedge funds to borrow heavily and act more speculatively in their drive to make the maximum amount of money.

If this speculative scenario takes place, Grantham thinks the S&P could move all the way back to 1500 or 1600 which is much higher that its current value of 1100.

Unfortunately, he believes this might lead to yet another bust, one which would be spectacularly dangerous because the government’s piggy bank would be empty, with no more money to rescue the market and the economy.

The final path to which he gives only a 21% probability is: In the next few months, two or three of a long list of potential problems would come home to roost knocking the S&P 500 down to about 900 or so (a 20% decline from today’s level).

What we are seeing now is a struggle between those who are betting on a sustained-speculation theme and those who think two or three things will go wrong and crack confidence.

This struggle is an unusual one creating effects he hasn’t seen before. On the one hand this market is “fearful” but at the same time “speculative”. How is this possible?

Low rates tend to produce an aggressive feeding frenzy for institutional investors, but merely produce a feeling in ordinary individual investors somewhere between dejection and desperation. Individual investors hate to park money in cash which earns them nothing, yet are still thoroughly nervous, so surveys reveal about normal stock investing.

My Thoughts:

Individual investors are feeling trapped between battling giants, as institutions fight it out with each other for dominance. It feels too dangerous to compete with goliaths for fear of getting trampled, so the strong tendency is to sit on the sidelines and watch them battle it out.

When the winner is determined, one hopes to join the victor and enjoy the spoils. Unfortunately, at that late date, there is little money making opportunity left, leaving the investor with mediocre returns and more risk.

The real key to money making if you can do it, is to see clearly through the fog of war and take your opportunity as the battle swings from one extreme to the other.

Alas, this is easier said than done, but armed with knowledge and patience, the savvy investor has a much better chance of creating greater wealth today than he has had in the last 10 years.

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Posted by: Steve | July 22, 2010

A Brief History of Mutual Funds…

Many of us think of mutual funds as a relatively modern invention however, the first mutual fund dates back a number of centuries. Interestingly, it was another severe financial crisis that led to this new invention and resulted in the predecessor of the modern, diversified mutual fund.

The Catalyst

In the mid-eighteenth century, the British East India Company had borrowed heavily from British banks to expand its far-flung colonial interests. By the 1770s, the Company’s financial troubles came to a head. At the same time, the royal treasury was stressed due to dropping revenue and rising expenses related to unrest in its colonies in North America. Ultimately, a severe financial crisis ensued around 1772-1773 bankrupting British banks due to an over-concentration of investments in the East India Company.

As it happened, the Dutch too were actively in colonial politics and investments and their banks suffered the same fate as the British – much like the copycat risk-taking and banking contagion of 2008.
 
1774: The First Mutual Fund

Born from this crisis was the forerunner of the modern mutual fund, created in Amsterdam in 1774. The fund’s name, translated from the Dutch, meant “Unity Creates Strength”. The fund offered smaller investors a way to pool their monies and held diversified investments in government bonds of Austria, Denmark, Germany, Russia, Spain and Sweden.

Some of its investments were in securities backed by income from plantations in the West Indies and the United States – forerunners of the mortgage-backed securities that we are so familiar with today.
 
The details of the investments and cautionary warnings in the original Dutch documents were in essence, the same as cautionary statements in today’s mutual funds (without the high priced lawyers, no doubt) warning investors about putting all their eggs in one basket and touting the benefits of diversification.
 
Mutual Fund Evolution

Over time, more of these funds were created but the first investment trust outside the Netherlands was founded in London in 1868 – it was called the Foreign and Colonial Government Trust and mirrored the original Dutch fund. 
 
In 1873, Robert Fleming launched the Scottish American Investment Trust which invested in U.S. railroad bonds and made a fortune. As an aside, Robert’s grandson, Ian Fleming, created the James Bond character keeping the family-name alive albeit in a completely different context.
 
The investments up to this point were similar in nature to today’s closed-end investment trusts. In other words, a fixed number of shares were created to raise money for the funds’ investments. After which, if an investor wished to buy or sell he would have to find a willing investor to trade shares with him.
 
In 1924, the Massachusetts Investors’ Trust introduced the first open-end fund. It allowed holders to sell shares back to the Trust at the day’s current value (what we call the Net Asset Value). Similarly, buyers could purchase new shares directly from the Trust at any time.

In 1929, the majority of funds were still based on the original Dutch closed-end structure and only a few were open-ended. The crash of 1929 changed that – closed-end funds lost their popularity and open-end funds skyrocketed in popularity.

Today’s mutual funds are predominantly open-ended yet, to the credit of the original Dutch creators, closed-end funds still exist today in a form mostly unchanged from their predecessors 235 years ago.

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Posted by: Steve | July 16, 2010

A Good Mystery Revealed…

The Rattler

Earlier this month The Wall Street Journal (WSJ) sent gold and financial markets in a tizzy, publishing and article entitled “Central Banks Swap Tons of Gold To Raise Cash, Surprising Market.”

The article reported that a few European central banks – no names mentioned – had borrowed close to $14 billion as a 1-year loan from the Bank for International Settlements, and pawned 346 tonnes of their gold as collateral.

Some Background

A central bank, such as the Federal Reserve Bank in the U.S., is a nation’s primary bank. A central bank prints the nation’s currency – the paper dollars we use every day – and holds the nation’s gold reserves. For example, the Fed holds about 5,000 tons of gold in its underground vault in Manhattan, with more of the nation’s gold stacked away at Fort Knox.

Think of the Bank for International Settlements (BIS) as the central bank for central banks. It coordinates monetary policy with its 57 member countries, which include the U.S. and our major trading partners in Europe, Asia and South America.

The Fallout

The WSJ article surprised the markets because central banks have not used gold for collateral since the 1970s, and because this was the largest gold-swap in BIS’ history. That BIS did not mention the countries involved, led to further speculation of the possibility that European nations were on the brink of collapse and were desperately pawning-off their gold for cash. Shortly after the WSJ story ran, the BIS issued a clarification saying that the gold-swap involved commercial banks, not central banks; however this only added fuel to the fire as analysts noted that no commercial banks held such large quantities of gold, and that the swap was more likely a country in crisis using a commercial bank as cover-up.

Likely Impact on Gold Prices

Ironically, before the WSJ story ran, the World Gold Council had issued a report that made the case for large-quantity gold purchases by central banks, however the WSJ article revealed that central banks not only had no spare cash to buy gold, but were selling off large-quantities of gold to raise cash.

Furthermore, if Europe’s weak economy does not recover over the next twelve months, the banks borrowing the money may not be able to pay it back. If that happens, the BIS will likely sell this gold and add to global supply. As Economics 101 tells us, if supply is anticipated to exceed demand, prices should trend lower.

The Final Twists

On the day the WSJ article ran, China announced that it would not be adding to its gold reserves. Gold promoters were hoping large purchases by central banks in Asia would boost gold demand and price. However, China’s announcement dashed their hopes and reinforced negative fallout from the BIS transaction.

Also consider that high unemployment and a weak global economy are unlikely to leave ordinary citizens with spare money to buy gold, especially at such high prices. If unemployment stays high, many may resort to selling their gold to put food on the table, only adding to supply.

The Conclusion

Possible future sales of gold by the BIS, lower demand from China and lower demand from weak consumers may be the one-two punch which knocks-out any illusion from modern day Midas’s that the age-old desire for gold will bring vast riches.

Therefore, gold bugs beware!

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Posted by: Steve | July 9, 2010

Gold: Bauble or Bubble…?

Humankind’s Obsession with Gold

From the beginning of modern times, gold has held a special place in human history. Gold is not the sturdiest of metals and its tangible usefulness to humans, say for weapons or manufacturing is close to zero. Perhaps a few simple properties established gold’s predominant position in our history – the fact that it never rusts or otherwise disappears over time; that it is soft and malleable and can easily be made into jewelry, or flattened for gilding or other adornment purposes; and that its luster caught our fancy.

Whatever be the case, gold has been an integral part of human history for millennia – as a symbol of wealth, power, and humankind’s vanity, of course. Gold is the only metal that has over 400 mentions in the Bible including detailed instructions to Moses on how much gold to use to build the tabernacle. From Midas to Croesus, from Caesar’s Rome to Spain’s exploitation of the New World, gold has been both the joy of civilization and its scourge, inspiring the most beautiful works of art and the most unspeakable of horrors.

Pindar, the 5th century Greek poet, famously said “Gold is a child of Zeus. Neither moth nor rust devoureth it. But the mind of man is devoured by this supreme possession”.

Gold in the Monetary System

Gold coins were first used as exchangeable money around 635 B.C. and because gold was limited in supply, it was seen as having enduring value. As commerce grew, cheaper metals came into use for coinage provoking people to hold on to their gold for its value and as a portable, dependable asset in times of war or exodus.

In modern societies as global trade expanded at a rapid pace, countries switched to paper currency which initially was backed by a quantity of gold bullion held in reserve. In time however, currency was taken off the gold standard and allowed to float free based on a country’s economic output. This has created the sense that paper currency has little real value causing “gold bugs” to rant about the worthlessness of the world’s currencies.

Limiting a country’s entire economic output on a metal hides in the ground is madness and as Warren Buffett has wittily remarked on our strange obsession with gold, “It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Yet, gold continues to hold its special place in our psyche. During times of war or uncertainty, gold rises in value. Iraqis fleeing their country thought nothing of leaving their Saddam-faced currency notes behind but made sure they took their gold with them. It is remarkable that this ancient innovation is still an active part of our monetary value system even today.

Gold as an Investment

So why does gold fascinate us so? Is gold the inflation hedge we were taught to believe, or is it a “crisis-hedge” that we flock to in times of uncertainty? According to Kimberley Sterling, President of Resource Consulting Group, “Gold is speculation, gold is adornment, gold is wealth and gold is trouble.” Statistics show that since 1900, gold has returned a grand total of 55% after adjusting for inflation, equating to an average annual return of merely 0.5%.

So gold is really a non-investment. During economic crises, people get afraid, buy gold, and bid prices up to unsustainable speculative levels. History shows, however, that when the crisis passes, gold values plunge.

With gold currently trading at prices far higher than its intrinsic value, gold investors are operating on the “greater fool” theory. The theory states that if you buy gold today, the only way you can hope to make any money is to sell it someone who is a greater fool than you.

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Posted by: Steve | June 25, 2010

Is Wall Street At It Again…?

Lately, I’ve been reading a lot about Alternative Mutual Funds, and invited Greg McBride, Senior Financial Analyst at Bankrate.com to a discussion on these funds.

An AMF is essentially a regulated mutual fund with the investing freedom and upside of a hedge fund but without many of its downsides. AMFs are open to all investors, not just the rich, charge significantly lower fees, disclose their investments, may be bought or sold daily, and have higher liquidity than hedge funds.

AMFs commonly go long or short stocks, invest in commodities or focus on multiple strategies.

Long-Short

AMFs simultaneously go long (buy stocks for price appreciation) and short (borrow and sell ‘over-valued’ stocks hoping to buy them back later at lower prices) to enhance returns.

On a long position, shares bought at say $20 could, in the worst case, go to zero. On a short position, instead of falling, shares could rise to say $80 or higher, causing losses of $60 or more. So going short is dangerous and may cause sizable losses if positions are not hedged.

Commodities

AMFs also invest in commodities – natural resources like oil, food items from orange juice to soybeans, precious metals such as gold, silver or platinum, and more.

Commodities do not always move in sync with stocks or bonds, and may thereby add diversification to your portfolio while also reducing volatility. As with every investment, investors must carefully assess valuation and risk. In 2008, investors who bought crude oil by the bucketful at $140 per barrel got crushed when crude fell to $35 per barrel.

Multi-Strategy Fund

A multi-strategy fund – also called an Absolute Return Fund focuses on generating positive returns in every investing environment. Greg adds that multi-strategy funds are not hemmed into any particular asset class – they can go long or short, buy assets or futures, use derivatives and trade less-liquid investments.

Such funds aren’t a replacement for other asset classes but should supplement them, and be used as the seasoning to your investment soup, not as basic stock.

Greg warns that multi-strategy funds have higher fees, higher minimum investment amounts and possibly less liquidity than long-only or index funds. If events cause everyone to want to exit at the same time, a fund’s price may drop sharply perhaps well below the actual value of its holdings. For example, during the flash crash in May 2010, investors simultaneously headed for the exits causing prices to drop precipitously.

Suspect Marketing

Investors have realized that actively-managed mutual funds regularly under-perform the market and so they have moved to less expensive index funds. As a result, Wall Street has lost sizable fee revenues.

Nowadays, investors are clamoring for some assurance in an uncertain world. In response, Wall Street is aggressively marketing AMFs – more for their higher fees than their touted benefits as less volatile and less risky than traditional funds. Whether excess returns justify such higher fees remains to be seen.

Wall Street is a sales culture – they will develop products that seemingly assuage investor fears. Unfortunately, an alternative mutual fund may create more problems than solutions for the small investor at the wrong time. So buyer, beware!

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Posted by: Steve | June 16, 2010

“Show Me The Money”! Blue Chips Take The Lead…

Click Here to Listen…

 

What a volatile market!

I’ve been studying the markets for 28 years and have seen a lot of volatility. But recent stock market gyrations – down days not seen since the 1940s, then dramatic reversals to the up-side without any apparent reason – are enough to drive even the most hardened among us crazy. Right now, it is very hard to predict what lies in store for the markets in the weeks or even the months ahead.

However, the people who run America’s best corporations seem to have a different, more confident picture of where this economy is headed.

Many companies are now sitting on more cash than they have in the past, and are starting to return more of that money to shareholders – either by initiating stock dividends for the first time, by raising existing dividends, or by announcing share buybacks.

This June, Viacom (parent of Paramount Pictures and MTV) initiated a quarterly cash dividend of $0.15 per share and resumed a share buyback program which it suspended in early 2009 due to weak economic conditions.

Retail giant, Target Corporation, announced a 47 percent increase in its quarterly dividend to $0.25 per share. “Target’s cash generation is well above the amount needed for optimal reinvestment in our core business,” said Gregg Steinhafel, Target’s CEO.

Target rival, Walmart, whose stock has languished over the past few years, raised its annual dividend by 11 percent to $1.21 per share and unveiled a $15 billion share repurchase program.

Caterpillar raised its quarterly dividend to $0.44 from $0.42 per share. Apparel-maker American Eagle Outfitters hiked its quarterly dividend by 10 percent.

And Monsanto announced a $1 billion 3-year share repurchase program.

When a company initiates a stock dividend program, it makes a long-term commitment to its shareholders. Dividend programs signal corporate confidence in future earnings’ prospects.

By significantly raising its dividend, Target makes its shares more attractive for investors who would like nothing more than to earn a fat dividend from a great company while they wait for the economy to turn around.

A stock buyback can be a one-time event. However, when a company buys back shares, there are fewer shares outstanding, effectively increasing earnings per share. This should, theoretically, increase the value of each share over time and benefit shareholders.

In this environment of stock volatility and economic uncertainty, one would expect corporations to button-down and hang-on to all the cash they have. Instead, corporate chiefs are voluntarily returning excess capital to shareholders.

So take heart – corporate actions suggest that perhaps the economy may be on a path to get better sooner rather than later.

Focusing on the fundamentals, rather than on daily market fluctuations, may lead you to making good investment decisions. Or, at the very least, may give you the fortitude to hang-tough with the positions you already own.

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Posted by: Steve | June 10, 2010

Have You Been Swimming Naked?

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Now that I have your attention, here is the whole quote from Warren Buffett: “You only find out who is swimming naked when the tide goes out.”

It is also said! “A rising tide lifts all boats” and “In bull markets every investor looks like a genius”. From March 2009 through April 2010, the Dow rose 70% and almost everyone holding stocks made money.

Just as individual investors look smart in healthy bull markets, so will many investment advisors therefore, never confuse a good market with a good advisor.  Advisors too could be swimming naked… with your money!

An advisor’s job is to understand your financial goals and develop an investment plan that balances risk, rewards you when markets rise and protects you when markets fall as they inevitably do. A good advisor is also someone you can lean on for trusted advice during uncertain economic times.

I recently had a very nice couple come into my office. They had made some money on their investments last year, and wanted my advice. When I looked at their investments, I realized that the only reason they didn’t get into real trouble was because last year’s across-the-board bull market “papered-over” a lot of their investing mistakes. For example, while the average stock dividend payout is in the range of 2%, this couple had invested in a company that paid a 14% dividend. What kind of company pays 14%? The kind that has severe financial problems! I know that sounds counter-intuitive, but take my word for it.

Yet, I commend this couple for seeking professional assistance with their investments. They are being honest with themselves, and have not let past investing successes and ego go to their heads. They are doing what-it-takes to safeguard their financial future.

Unfortunately, I also get way too many calls from folks who come to me too late, after much of the damage has been done. They complain of not earning enough income, investments turned sour, depressed home values and sky-high credit card bills. Unfortunately for such people, there are very few options left.

Of late, the markets have been tricky. In just two months since its April 2010 high, the Dow has lost 1,400 points, down a sharp 12.5 percent. Market experts are divided on future outcome – some predict far steeper declines, others believe markets will now stabilize. At this juncture, investors must honestly evaluate their portfolios. Are you confident about your investments? Will your holdings survive a steep decline in the market?

The tide is changing and may now be going out. So, what are you wearing?  Are you swimming naked? Perhaps it’s time you found out and did something about it.

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Posted by: Steve | June 2, 2010

A Rose Between Two Thorns…

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While I am a long term advocate of owning stocks, I pay close attention to opinions outside the mainstream that challenge my own point of view. Two attention-worthy opinions come from Mark B. Fisher, CEO of MBF Asset Management, and Nassim Taleb, author of The Black Swan.

Fisher’s World View

Fisher is bearish and believes there will be a great global “reset” away from paper assets such as stocks and bonds, to real assets that produce things people need such as oil, grain and, to a lesser extent, gold.

Fisher thinks our world has gotten crazily carried away with credit and leverage. Governments are “printing money, printing money, printing money,” which will ultimately lead to the devaluation of currencies and paper assets.

While public stocks trade at 15 times earnings, private equity firms pay no more than 6 or 7 times earnings, leading Fisher to believe that such overpricing may correct, taking the Dow down to 7,000.

Fisher believes oil will be the most valuable asset. He notes, “The irony is that every government is trying to regulate the price of energy, but down the line, the price of energy is going to regulate these governments.”

The World According to Taleb

Nassim Taleb sees the global economy as vastly more fragile today than this time last year. He too believes governments are “papering over” the debt problem by taking on private debt.

With debt-ridden governments around the world issuing more debt, supply will exceed demand. Taleb foresees a “very bad day” when government bonds will just have no takers. To avoid this, he believes governments must reduce dependence on debt and focus more on creating budget surpluses.
 
So there you have it – two rather negative views on paper assets. Reasonable? Yes, disturbingly so. Crazy? Decidedly not.

If you believe in these two scenarios, what do you do?

What to own

Investors must rebalance their portfolios to survive these uncertain economic times.

First, investors should own very short term bonds. Stay away from bonds with long term maturities and fixed rates. Any investment locked-in to today’s historically low rates will not keep pace with tomorrow’s higher costs of living.

Second, invest in a basket of precious metals – gold, silver, palladium and others. Aggressive traders can buy way out-of-the-money options for gold or silver, and bet against treasury bonds.

Third, invest in producing assets such as agricultural land through sector-focused funds.
 
What to Avoid

Real estate is a non-productive asset, avoid investing in it.

Do not own stocks, long-term bonds or currencies.

Rein in unnecessary expenses, pare down budgets and start building surplus wealth to protect against future uncertainties.

With your portfolio rebalanced, go out and enjoy life. After all, it’s only money, and in time this crisis too shall pass.

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