I am still ~60-70% in 1-2 year municipal notes (VWSUX) and 1-2 year US Federal guaranteed notes (VSGDX). These funds are paying ~3.5% but are not losing much if any value. With this week's FED actions, money market funds are going to 1% in a month or two, so 1-2 year notes instead of 90 day notes are reasonable and pay a lot more. This is "parked" money waiting to see how the market mess sorts out.
I have gone back into many of the US and Canadian (COSWF only for Canada) oil and gas trusts I sold in July. They are debt free and have tiny bureacracies--in many cases only one or two employees. The true royalty trusts--CRT, SBR, DMLP (a partnership), PBT, COSWF --have no or minimal obligations for further drilling,,,they are pure pass through income trusts. Some of the others MTR and DMLP itself are long lived. All of their prices have gone down before their dividends have, but they may still be paying 7-10% annual dividends once prices stabilize, and they are are in monthly installments except for COSWF and DMLP which pay quarterly. This is to replace high yield bonds whose cycle has ended for years to come.
My long term view is that all the worldwide bailouts and lowered rates are extremely inflationary in an already inflationary era. That doesn't mean that they started up yesterday and will go up in a straight line every day. It's never that simple. Trust me. So I try to buy inflation-favored investments on days and in weeks when no one wants them. Buy low, sell high. I am buying solid energy and gold and commodity stocks or funds during down times. But I am not overdoing it because I could be early or I could be completely wrong. It's not science, it's judgement. I have bought ABX and TIP (US Treasury Inflation Protected Bonds) and have kept BWX which is foreign Treasury bonds. I still have Hussman's HSGFX and HSTRX and Rydex's RYMFX and a few tiny pieces of silver stocks. I'm scared and you should be scared too, so I am doing it gradually and sometimes taking profits in a some part of it when they go up which lowers my base cost
Believe me I'd rather trust in some one's fund or model completely and relax. But no one cares about me more than I do, so I prefer taking the smorgasbord or buffet approach and tasting and adjusting my plate as I go. Think of it as a game whcih you can win if you're good. I don't always win, but I do so often enough to keep working on it. :)
It's never really easy to be an investor of your own money. Fund managers and other professionals are managing other people's money, so if they have a bad year, it's like a baseball player having a bad game. It's normal to have a bad day or run, and they still get paid by "other people" even then, maybe a little less since their client's net worth is less, but it's still a paycheck. Managers of all types can give you theirbest "guestimate" and feel totally justified they've done a professional job.
If you mess up your own account there is no "paycheck" independent of your own money. So I admire people who do manage their own money, who put in the long years of study and watching because it's their money and their life. It can be done, and for many it should be done by themselves, but it's an on-going education and a lot of work.
I've just read a book first draft by a Wall Street mortgage bond expert, from the creme de la creme of elite bond packagers and marketers, from the best of schools, the best of Wall Street firms. He wrote some of the computer programs which "modeled" the complex packages of mortgage bonds for world class firms which have gone bye-bye, so that quality could be recommended and lack of quality avoided. None of these models worked last year or this. Plus he himself had long since lost his job and later most of his fortune in manic options trading. It's like Vic Niederhoffer redux.
If you aren't too overworked or too lazy, please do yourself a favor and adopt investing as your new hobby. It's a lot easier now with free or low cost internet sources all over the place and commissions very much lower than in earlier times. Use your brain and search engines like Clusty or Google. Keep your wits and be suspicious of charlatans, but read people who are sensible. It's not immediate or easy work but learn some of the principles of portfolio construction, test them and retest them and see what has worked. But even what HAS worked will not always work.
I had an "ideal" portfolio 18 months ago of funds which had survived every adversity for at least twenty years, but some of them have stumbled incredibly badly this year and are down over 25%. By luck or careful watching I was able to get out of almost all of them early on because they started doing things they had never done, in price. I can't even explain in simple words how I did it, but if you go back and read my posts over the past 18 months you will sense what I was sensing. I was trying to construct the perfect buy and hold portfolio, but it doesn't exist. The closer you getto retirement, the less you can trust to chance and random events. I cringe when I think of what some pre-retirees and already-retired have suffered this year from following "standard programs".
There is no easy bottom line except learn, learn, learn, work, work, work on investing your money. It's yours. Do not follow gurus and paid hacks. Find a level of safety you believe in and then work and improve from there. You can't lose short term by being only in money market funds, but you can only lose longer term being in them. That is the first and mostimportant concept to understand completely!!! Do you get that idea? It's very profound. Start there and branch out gradually as you learn, and if you do learn. You do not want to suffer 25%+ losses in any year like this year....far far less should you accept. If you can't see a realistic way to beat money market funds, forget it for a while. The down side is thatthe authorities keep reducing the money market fund rates. They want you to invest. Just be sure you can really make more than 1-2% for the next year and not lose 25%.
I've been buying a few gold and silver stocks finally this past week: ABX, SSRI, PAAS. But I remember 1987 when gold stocks went down in the crash when they "should have" gone up. I sold mine on crash day then because they faltered and started to fall even though gold bullion itself held up until December 1987.
There are two or three anti-gold stock pressures now. One is the general dumping of all stocks on margin calls, and another is the fear that financial disaster will be deflationary and cause gold bullion to collapse. Gold has come down for the past ten days. If that continues, there is a real chance of deflationary economic regime change even though we are in an inflationary era. A third pressure clearly is fear of what the US election will bring, and that result is becoming clearer by the hour. Capital flees from empowered anti-capitalists. "Sauve qui peut" as they say in the old country.
So far it is bullion which seems safest in all events.
Nothing is for certain, but I have a list of things to buy and have begun nibbling this past week. I bought some of the US oil & gas trusts: CRT, PBT, SBR, HGT. Also Dorchester Minerals LP DMLP, and some more COSWF. Some of these I owned and sold at double the current price. A few are new. I may buy some more if they stay reasonably priced or go down. Both the prices and the peak dividend rates are or will be down, but they will still be paying 8-10% on the new lower prices. These have no debt, no bureaucracies, and for DMLP, COSWF, and CRT fairly long lives...longer than mine at any rate. I have also bought some Berkshire Hathaway class B BRK.B shares in ten share swatches, and may buy some more. I added some to HSGFX. Also I bought a few silver stocks. I am not going to be a martyr if things start to slide again, but if you don't buy when things are cheaper than they've been in ages, when else would you buy?
Some of the long term well known value buyers are emerging and starting to buy, Jeremy Grantham of GMO among them whose third quarter update has just come out.
Ironically, or just typically perhaps, he was fired by Vanguard as a manager of three of its funds early this year in part, I think, because of his persistent public bearishness which doesn't sell funds.
For several years this blog has highlighted long-dated bonds as the late starters or unfinished business in the current inflationary era.The monthly US Treasury long bond chart's 28 year up channel is getting ready to break. Then there are three consecutive 4 point, expanding, continuation down triangles, the first two of which end below their preceding highs and which is bearish. The end of the third expanding triangle last month was essentially a false break and a Gann double top with the 2003 bond price high. This is a massive top formation!
That's why I have been discussing here and holding for myself very, very, very, short term interest bearing instruments on balance.
Briefly and finally, interest rates are going up and the dollar is going down when the "vacation from inflation" completes in the not too distant future. Both rates and the dollar were already going that way and setting up for a break since 2003. It really has nothing directly to do with the current financial mess. It's all part of the rather well known supply and demand cycle about which I have written here so much. The disinflationary half cycle ended in 2003 at the latest, but Japanese style interest rate policy has held bonds, and other rate vehicles generally outside FED control, in abeyance at the top until now. The current mess will arguably make the outcome more extreme or violent, but it is well to understand this in proper context, not in journalistic and popular fantasies. The desperate reach for yield since 2003 came from artificially low short term interest rates since 1999. This is what led to lower rated mortgage-backed securities, monstrous credit derivatives, and emerging market bond madness. The rest followed naturally.
Economic data usually provide a clearer view in retrospect than at the time the data points occurred. Partly that is simply due to the fact that many economic data series are not available for one to three months after their occurrence. Data must be obtained, cumulated, calculated, updated, revised and published, and this takes a lot of time for large series such as GDP (Gross Domestic Product), and others, in all its varieties and state local subsectors. Thus we are often looking at data series which are from one week old to three months old. Market data and some economic series--unemployment benefits claims-- are instantaneous to one week old. It is only when all data from three months ago and earlier are examined that we can get a clearer picture.
Market data that can give us early clues, as well as long term clues, include nominal (actual) and real (inflation-adjusted)interest rates and the prices of economically sensitive commodities.* Nominal and real interest rates fall when economic conditions are weaker and rise when economic conditions are stronger. Short term rates, such as the 91 day US T-Bill, are strongly influenced by but not set by the Federal Reserve. they also reflect current economic demand Longer term rates such as the 20-30 year US T-Bond rate largely reflect long term demand.
Three widely used commodities in most sectors of the economy are crude petroleum, copper, and aluminum. They are used in many consumer products from homes and autos to food packaging and pharmaceuticals. And of course they are primary industrial commodities for a wide range of products and services. http://www.martincapital.com/chart-pgs/Ch_comod.htm
demonstrates that copper and aluminum made their initial price tops in the second quarter of 2006, and cash copper never went higher although it made secondary tops in 2008. Copper is often called the commodity with a PhD. The copper top in 2006 was an early warning that economic expansion was or soon would be slowing.
Much of the discussion and analysis from then to today was on gold and crude petroleum oil which made lows in later 2006 and accelerated their climbs into early to mid 2008. Debate raged and still does on the causes for gold's and oil's amazing races: US dollar weakness, peak oil and gold world production exhaustion, or rampant speculation. Regardless of cause, the effect of gold and oil spikes was to add a burden to economic production and confirm the copper and aluminum tops of 2006.
CPI, CPI Core & PCE Core Deflator shows that twelve month rates of change for the various measures of CPI (Consumer Price Inflation) also topped from late 2005 to the third quarter of 2006, and only basic CPI made a modestly higher rate of change in the summer of 2008. http://www.martincapital.com/chart-pgs/Ch_infl2.htm In my own work I correctly called the 2006 tops and corrections in commodities, and I anticipated but didn't "nail" the 2008 tops and "vacation from inflation". This was based largely on "Dr. Copper" and general commodity pricing and Kondratieff Long Wave analysis.
If we go back now and look at delayed economic data series, we see that many or most of them also put in rate of change tops in 2005 or 2006:
Despite all the added costs of rampant commodity price increases and the slowing of consumer demand, it took until 2008 to produce actual recession. This shows there was tremendous demand pressure driving the economy, not only in the third world but also in the first world of the Americas and Europe and East Asia.
So that is where we've been and where we're headed right now. How does the current financial melt down and credit crunch impact the economy and markets. Obviously we do not and cannot know with real certainty. If the credit markets truly freeze up, then an extremely severe recession will occur. My long term views are and have been that we are in an inflationary era of ~25 years following the disinflationary years of the late 1970's to 1999-2003. This long term alternation of about 25-30 years of inflation followed by 25-30 of disinflation is usually called the Kondratieff Long Wave of Economics, and I have written a lot about it at this blog.
An even longer economic era is that which is dictated by the predominant world political movement of the time. The predominant political regime sets the tone or "color values" for the economic long wave. The predominant regimes of the past 300 years were the Monarchial, Landed and Mercantilist Regime, up to the American and French Revolutions; then the Bourgeois, Reactionary and Tight Credit (gold standard) Regime from the defeat of Napoleon (1815; Council of Vienna) in Europe and of the U. K. in North America (War of 1812) up to Presidents Wilson and Franklin Roosevelt; and then the Social Democrat Easy Credit Regime (fiat currency, social spending and price inflation) since 1934.
Briefly, these two longer waves, the 50-60 year Kondratieff Wave and the Political Regime Wave, interact to make either the Kondratieff disinflationary half cycle more severe (Bourgeois Reactionary Tight Credit Regime) or make the inflationary half cycle (Social Democrat Easy Credit Regime) more severe. Thus in the 19th century under the tight credit regime up to 1934 the disinflationary periods of the Kondratieff Wave were severely deflationary, and since 1934 the inflationary periods of the Kondratieff Wave have been the most severe: 1950-1980 and 2003-recent present. The PPI chart from the late 18th century to 1996 makes this quite clear. For nearly 200 years PPI "traded" in a narrow band with frequent deeper corrections. After 1934 it is hard to discern even a slow down during recessions or entire Kondratieff disinflation, unless one does rate of change calculations. Since the point here is to talk about the very long term Political Regimes, I'll save the rate of change charts and discussion for another time.
Barring a change of the long term Political Regime, we will continue to have inflation as a preferred course of action and credit will flow freely. President Nixon said a long time ago that "we're all Keynesians now" and that has continued. Even under President Reagan, in association with Congressman Tip O'Neill, social spending and free credit flowed throughout the 1980's disinflationary slowdown, and credit bailouts predominated in the 1990's as well as now.
Could the current financial melt down lead to a Political and Credit Regime change world wide which would upset the Social Democrat Easy Credit apple cart and lead to a regime change which would reverse course and be less democratic, less socialist, and with tighter credit rules overall? I think that is the only event which would prevent or moderate inflation going forward. The central banks and governments of the developed, and developing, world are working and praying that doesn't happen, and historical odds favor them. It's not hard to imagine that a system could emerge somewhat similar to China's or Russia's: administered quasi-capitalism with tight dominant political class control of the economy and the people.
It took some years for the changes initiated by the American Revolution (1776) and French Revolution (1789) to result in the beginning of the Bourgeois Reactionary Tight Credit Regime (1813-1815). Likewise it a long time too from the founding of the US Federal Reserve System and Bank (1913) and the beginning of the Social Democrat Easy Credit Regime (1934). In both cases an inflationary run up completed and disinflation began before both regime changes were effectuated. In then absence of total disintegration of the current regime, my bets are on continued inflation after a "rest period" or "vacation from inflation" for the next six to twenty four months while it all gets sorted out.
Martin Capital makes the following statement regarding the data and charts: "Martin Capital Advisors, LLP is not responsible for the accuracy of the data contained in any of these charts or indicators. This information is provided for informational purposes only."
I am only providing URL links to Martin Capital which are available to the public on their own at their site. Regrettably, the post editor at my weblog is not reliably inserting URL's along with their hypertext titles, so I am posting the entire URL address art this time.
1. I think emotion is predictable, that is certain kinds of emotions lead to certain kinds of outcomes and mass consequences. When people are stunned by losses they are immediately angry and then anger soon turns to quietude or depression. Nothing much happens for a while because personal conviction is gone and apathy reigns. People "get along" or muddle through on inertia instead of conviction. 1931-35 was like that, and 1938-42, and 1974-82 and 1988-1992.
The mania of 1996-2001 was re-energized after 9/11 and continued on in family safety cocooning and cocoon equity extraction as marketers figured out the national mood and served it too well. The safety cocoon mentality has been dealt a major blow since 2005/2006 and won't recover for a good while.
Every normal asset class in developed and developing economies was driven to overvaluation, from bonds and stocks to real estate and commodities and currencies, since 1982 and 2002. Cash is now the most undervalued asset class and gold is next. Values are developing in stocks and real estate but liquidation will continue. Even gold is being liquidated but it is needed to validate cash in an inflationary time. cash validated by gold allows us to shop patiently for bargains before the next flight.
2. The 90 year old, sturdy, San Francisco fund and private money managers at Dodge & Cox and many, many others fell into a deep mine shaft this past year after decades of success. Their office was down the street from me, and I knew a few of their management casually. But many retired and new analysts and in recent years partners of a contemporary bent came on in droves who thought that conservative value investment principles were a simple formula of buying unloved stocks. I could see early last year that they were "losing it" and got out early. Their flagship Dodge & Cox Fund DODGX is down 41% on a total return basis on the past 12 months according to my FastTrack data base! Even more conservative operators over the past two decades like SGENX and LSBDX are down nearly 20% total return (including dividends) for the past 12 months. That's totally devastating and inexcusable.
There is no way that investors over 35-40 years of age can just buy and hold indexes or even solid managed funds and assume all will be well. We have to be diversified and we have to watch the investments like a hawk and cut them out when they start doing things price wise they haven't done before. Fire them when they start "acting bad" by moving to cash followed by thinking and looking. If we lose 40% in a year we have to make 67% the next year just to get back to where we were, assuming no taxes which could make it even worse.
Skepticism and fear of losses can serve us well, not stop loss orders. Money managers don't want you to move your money since they will lose the fees we pay them whether in mutual funds or separate accounts. Fund super markets like Charles Schwab, Vanguard, Fidelity, T R Price and others let us manage our own money if we will learn to do it. Otherwise we are doomed to mediocre performance. Mediocrity may work over a 50 year period when we are working and saving, but not when we need to live on our money. Get those concepts clearly in mind.
This is a period of careful watching and waiting for investors. A battle is raging between the strong forces of inflation and the potentially strong forces of deflation. The battle has been going on all year, but the ante has been raised with the Congressional action and the sudden deteriorating jobs and output statistics. In the long run I firmly believe it is inflationary, but the concept of serious recession has just begun to set into most minds it this past week. Beliefs are not nearly as important as market action at such a time as this.
All year we have seen "inflation days" or weeks followed rapidly by "deflation days" or weeks. The 30 year US Treasury bond futures and US dollar are the deflation players and gold and crude oil have been the major inflation players. I have fairly successfully straddled this chasm, or hedged it, in my family investment accounts, and as of Friday I am down 0.52% on the year. This does not include bank accounts, personal effects, auto, home. I consider it a triumph, but I could and should have done better.
My major mistake was staying too long with too large a position in LSBDX which I began reducing in mid August about the time of this post and I finally got LSBDX down to one-third of its previous size. The nearly 8% yield wasn't a great enough buffer against the fall of high grade or high yield corporates, nor did HSGFX hedge it as I expected. That Dan Fuss and Bill Gross took some similar hits as well is scant comfort. I put most of the proceeds into VSGDX which is about one year duration "Treasuries", formerly known as "Agencies". I still have a sizable piece of VFIJX which is four year GNMA's.
On the taxable side I have both the one year Vanguard muni fund VWSUX and 2.5 year muni fund VMLUX. Governor Schwarzenegger's apparent application to the FED for a $7 billion loan on Friday is making me move the second fund to the Vanguard muni money market fund and possibly to more gold if we don't see some positive response to the Congressional pork pie passed and signed on Friday.
In times like these, and even for retired people, income may need to take a back seat to capital preservation for a while. It might be better to spend a bit of capital out of a money market fund than lose it in something stupid, and to keep a lot more in gold. I had only been semi-joking when I told friends at the beginning of the year and before that I was assembling a "Hillary" portfolio of short term muni's and gold, on the basis of probable tax increases and inflationa in a democrat-controlled Congress and White House in 2009. Currently, however, events may depend less on politics than on economic and financial reality. There is wide-spread unhappiness on the right and left about what has happened last week, but at least "the plan" was done by concerted action of both the republican and democrat "moderates" under President Bush. I think they all recognized the potential for major social unrest if there wasn't a broad coalition or it was put off until February 2009 or later.
This is no longer the Roman Republic, folks. Julius Caesar and the traditional Senate are dead, and we're into the Empire. To crudely, but respectfully, paraphrase President J. F. Kennedy, "ask not what your country can do for you, but what you can do for yourself". Use your ears and eyes and brain in all aspects of your finances and life.
The ignorance, gullibility, and corruptibility of politicians is legendary though the ages. But when $700 billions are to be spent, they rise to their optimal failure levels with a hand out and a look of serious purpose on their faces.
There's no better time for a massive confidence game than during a bear market and a financial panic. Add in a stormy presidential election campaign between a young lightweight moron and an aging war hero, and it's good to go.
My favorite market and economic analyst in this time of crisis is John Hussmann, both of whose mutual funds, HSGFX and HSTRX, I own:
"However the final legislation is written, the Troubled Assets Relief Program (TARP) being rushed through Congress will evidently be built around its single worst provision, which is that the Treasury will have authority to purchase distressed mortgage securities from U.S. financials......"
"A better approach would be for the government to provide capital directly, in the form of a “super-bond,” in an amount no greater than the debt to bondholders. The “super-bond” would be subordinate to customer liabilities, so it could be counted as capital for the purpose of capital requirements, and would be seen by customers as a legitimate cushion of protection. However, in the event of bankruptcy, it would have a senior claim in front of both stockholders and even senior bondholders. Do that, and you've actually got a mechanism to protect the financial system while at the same time protecting customers and taxpayers. Ideally, the super-bond accrues a relatively high rate of interest so that financials have an incentive to shift to private financing as soon as possible, but you would also defer the interest until the bank meets a minimal level of profitability to make sure that the financing doesn't strain the institution's liquidity."
"But then, Congress didn't do this because nobody thinks in terms of balance sheets....."
This is, as Hussmann and others recognize, what Warren Buffett is doing with Goldman Sachs and General Electric, but the "republic, for which we stand" will waste its assets in corrupt and inconsequential silliness.
Read the whole thing and weep for rationality gone missing.