Recently I wrote, "I am reading almost equal numbers of urgent deflationists and urgent inflationists which suggests to me more of this churning action we now have lies ahead this month and into next month." What I noticed about these articles was that almost all of them were written by people who were either selling something or defending their market position, also known as "talking their book".
In commodities and gold this is a very common feature. Most of the loudest inflation and hyperinflation proponents own gold mines or commodity fund management companies or write newsletters for a living. Among the deflation predictors there are also many newsletter writers and bond experts or managers. Naturally there are media propagandists and politicians on both sides as well. In fact the first question to get a quick answer to in a "'flation debate" presentation is "what is this person selling?"
Another group--and I'm embarrassed to say I have sometimes fallen into it up to hip boot depths--hyperventilates about inflation or deflation out a sense of anxiety about what the credit crash actually means. There are very few people now living who were investors from 1929-1933, so we have no personal experience, good or bad, for such events as we have just lived through. Even if we are economists, and I'm not, we know that economists are generally wrong about the major moves such as recessions and booms and much else.
Given my longstanding interest in gold and my 20% asset commitment to various gold investments, half of which is the metal itself, I have read scores of analysts, mostly pro-inflation but not all. So I have read a lot about Roy Jastram's major book, the Golden Constant, first published in the 1970's and now just updated and republished. I have read about Gibson's Paradox and the man, Lawrence Summers, who will likely replace Bernanke next year, and much monetary history. With the news leading up to the announcement late last year that Jastram's Golden Constant would be updated and republished, there have been a number of articles written about Jastram's views on gold, most of them quite short or commercial-political. The best of the articles on Jastram is from 2005, "Gold and Deflation: A Dissenting Dissection" by Bob Landis. http://www.goldensextant.com/ This article strongly makes the point that gold, according to Jastram and the author, Bob Landis, does very well indeed during deflation.
At the same site click on "library" and then click on the last item "Roy W. Jastram, Remarks to the Security Analysts Society of San Francisco (December 2, 1981)". This is an excellent summary of Jastram's work and conclusions including his charts of English gold and commodity prices and the purchasing power of gold from 1560 to 1977 and in the US from 1800 to 1977.
I have a copy of the new Jastram edition on order. I'll be very interested to see what Jill Leyland, formerly of the World Gold Council, will have to say about gold from 1977 to 2008.
In any event we appear to have compelling arguments that gold holds its purchasing value over long periods of time regardless of inflation or deflation. I remind you of this chart I have shown on the blog several times before of cash, gold, TBills, TBonds, and stocks from 1800 to 2002 showing that cash has gone nearly to zero while gold has held its value.
Also very well worth reading on the 'flation debate is Paul Kasriel's "Greater Risk over Next Five Years – Inflation or Deflation?" of June 1, 2009. Kasriel is one of the few economists I really respect, mainly because he's usually correct. In this article he presents his forecast based upon three variables he has found to be predictive of inflation levels.
Last, another chart shows the projection for US CPI by the Financial Forecast Center, updated Friday. Their website is http://www.forecasts.org and their projection, based upon a rules-based artificial intelligence system, is quite similar to Kasriel's call for moderately elevated inflation (3-4% annually) over the next three years.
I've always been a fan of what are now called "alternative investments" and never really cared as much for "generic index style equities", although I have owned them of course. Property, commodities, gold and higher yield instruments were always more interesting to me once I began to understand how imbedded inflation really was in the modern world.
Now that I am retired and living on my money, my "business" is to generate income as a goal more important than capital gains. Increasingly I am working on the great divide between tax-deferred and taxable accounts in the US, now and for the future. Perhaps we should call them "totally taxable" and "partly taxable" accounts since every penny one takes out of the IRA or 401K is taxable while only gains and dividends and interest are taxable from the taxable accounts. To take gold as an example, I'll want to own gold and gold stocks (CEF, GDX, RGLD,SLW) in the taxable accounts and own the high yield Gabelli buy/write (GGN) gold stock fund in the tax-deferred accounts. For oil I'll want aggressive growth petroleum stocks for the taxable accounts and the high yield oil and gas and pipeline funds in the totally taxable tax deferred accounts.
In yield vehicles this dichotomy is also important. In the taxable accounts it's important to limit taxes on interest, and I have used Vanguard municipal bond funds for this. Fearing rising rates in munis for several reasons, I have long since moved almost completely to the very short term end with VWSUX which is only about one year in average duration. It is only paying about 2.3% right now, but that makes it nearly 3.4% compared to taxable short term vehicles. Have you noticed what TBills are paying now?
In the tax-deferred accounts I have also been looking at and owning "buy/write" funds beyond GGN. Many of these are closed-end stocks although there are a few open-end mutual funds (HSGFX) which do the same things. All of these along with everything else got smashed last winter and in March this year due to margin calls and dumping by hedge funds who had leveraged these funds up greatly with borrowed money. I started moving into these funds very slowly before and after the lows in bits and pieces. Many were yielding over 20% annualized on November to March market values and were selling far under net asset values.
The "buy/write" approach has been used for generations by wealthy people to increase the yield of their stock portfolios. You own a portfolio of blue chip stocks and then consistently write covered call options above current prices. You collect the dividends and the premiums for the sold options. You are limiting your potential gains if the stock rises, but your income stream is good. It's better when market volatility is high, but that usually means that stocks are going down, so you can lose that way. Since last fall and this spring, volatility and fear have been high so that the option premiums have been good. Many of these closed end funds have had amazing gains but are still far below their prices in 2006-2007.
If prices go up normally volatility declines and the option premiums drop, but these funds can keep re-buying and re-writing and ringing up capital gains. In a totally taxable (deferred account) you are less interested in gains than in income. You can tolerate capital losses if income stays high, and it does.
I have always liked HSGFX as a classic unleveraged buy/write fund. Hussman's goal is to pick good stocks which theoretically all go up and sell options or futures on the SPX and NASDAQ which represent the typical or average stock. This worked brilliantly from 2000 to 2003 since quality stocks were oversold and junk stocks overbought. He's had an uneven record since 2004 since junk and quality have been treated nearly the same by the market.
Eaton Vance has a number of very interesting "alternative" closed end funds using either leveraged or buy/write strategies of various types. I made very good gains in both ETG and ETO in the past few months but have closed them out as they seemed quite vulnerable to a stock decline if we have one. ETFConnect is a another good place to look at some of the basics of their funds. Also look at them on a good chart site both with dividends included and without. BigCharts (without dividends) and Morningstar (Snapshot Performance Charts with dividends) are good places to look at them.
One of my current favorites is Eaton Vance Risk-Managed Diversified Equity Income Fund, ETJ. This fund writes puts but also buys puts to gain both income and price protection. Read their literature at the site to see how they do this. They are paying over 10%, but did much better pricewise during the crash and after than any of its competitors.
Right now, in addition to GGN for gold stocks and GIM which is a foreign sovereign bond fund from Franklin Templeton which has been around for decades, I have ETJ. Add that to the oil and gas royalty trusts and a pipeline trust (TYG) and TIPs fund (VAIPX) plus a much smaller portion of PCRIX, and a larger portion of LSBDX. Except for HSTRX, which I plan to move to the taxable fund, all of these pay decent dividends. If you are retired and have money in a totally taxable but tax-deferred account, be sure it pays interest or dividends which would be totally taxable anyway.
In the taxable accounts, two-thirds is in VWSUX and the rest in the gold stocks mentioned above plus the Trader Vic Rydex Managed Futures Fund (RYMFX). In both types of accounts I am currently still making bets of inflation/currency debasement with a reasonable part of the totals but with a heavy income emphasis. I have reduced the total number of holdings so that I can move quickly to sell or switch if conditions change.
How I wish that it were possible to develop a "set and forget" portfolio as I tried to do several years ago, but times and markets have changed and so must I. We have to think of our investment portfolios as being our own hedge fund, in the good and original sense of that term. Looking at the chart featuring many of the funds I am describing today. I look fondly at what HSTRX and RYMFX have done through the difficult markets of the past two years. ETJ and HSGFX didn't do too badly either. All four of them are themselves hedge funds in a sense, being alternative and managed funds. (The chart dates from the first week of ETJ in August 2007.)
After the flu, most likely H1N1, and and a R & R trip to the cool and foggy west coast of the US, I'm back.
I've made almost no changes in portfolio except that some, but not all, minor standing limit sell orders for some oil and gas trusts and golds when they got above upper limits, got filled, and I bought some additional SLW yesterday on the metals pullback.
The Dow picture and prognosis from two weeks ago remains valid. The down trend line at about 8475 on the Dow needs to hold. Sentiment remains less bullishly orientated than one would expect near a bear market rally high, so it probably isn't one.
A very astute cyberfriend of long standing sent me this message and chart today about the ISEE index:
"First daily reading below 100 for a very long time.
Does it mean anything, I wonder?
I would like to see one final market plunge here. And, sure, there are signs the economy isn't falling as fast as it was. But no sign yet that is actually gonna turn up.
Perhaps next month we will see some indications? Then again .............. "
10-Day Moving Average
20-Day Moving Average
50-Day Moving Average
ISEE is a put/call index similar to CBOE's but restricted to new stock options positions.
This is what I wrote back, similar to my earlier posts here on the 2CS:
"If I understand the ISEE indicator correctly it is showing the most bullish sentiment number since 3/9/2009? My 2CS just had it's most bullish number since 3/9/2009 on Monday when it was 114.
"Within the past hour I wrote this to zzzz and yyyy: (Note the error in it about 117 being the low. I didn't see the 114 number until just now.)
"The sentiment stuff I do suggests this current move down is not likely the start of a Neely-oid crash move. The lowest my 2cs (5 day total of each day's cboe p/c * each day's VXO) has been is 117 on last Friday. That's still a fairly high level of fear and loathing even for a bear market rally top. It should at least go into the mid-90's. Most bear market highs from 2000 to 2003 went into the 70's. People were then still hopeful of suddenly regaining the all-time highs since those highs were still close in time and therefore in memory. That's why i'd start to get bearish now in the 90's and 80's and not wait for 70's."
I would interpret the ISEE in the same way, xxxx. It's starting to get more bullish in sentiment but probably not bullish enough yet for an intermediate term top. Of course I reserve the right to be wrong...(;^)) ........""
It looks like a normal exhalation in stocks after a strong move up which is not widely believed in. I'm scarcely in "generic" stock index type stocks anyway except for ETY which is a "buy/ write" blue chip options fund and a small position in VWINX in a family member's account. Most other stocks I have are orientated toward inflation beneficiaries. LSBDX's corporate bonds do tend to trade somewhat with the stocks of the same companies.
I am reading almost equal numbers of urgent deflationists and urgent inflationists which suggests to me more of this churning action we now have lies ahead this month and into next month.
The Dow 30 is back up to the lower channel boundary through which it fell in October. The 200 day moving average is also in this same area. The Dow has recently moved above the down trend line from the May 2008 rally high. One optimistic scenario would be that this down trend line is support on a pullback and then the Dow pushes above the channel boundary and 200 day moving average.
Stocks are creeping up and the 2CS (five day running total of each day's VXO times each day's CBOE P/C ratio) remains above the level expected in a bear market rally or even in a bull market. Pullbacks have been frequent enough but mild enough to prevent market sentiment (2CS) from getting overdone. I thought May would be it but July or even later looks increasingly probable.
I have played this late but with proxies for stocks, such as commodity-related issues, closed end funds, and corporate and foreign bond funds. I am beginning to take some profits where they are strong and where there are questions about certain items. I have owned all of the US oil and gas trusts plus Canadian Oil Sands but have sold out the latter plus San Juan which has some continuing legal problems plus low returns and low reserves. These are just examples of what to do as prices are rising. I have more on my limit sell list.
At some point I am going to have to cut back a lot more since I do not see this as a new bull market which will last for years. If I were 25 years old I would probably stick with it and take the risks, but I'm not and I can't. I think it was Bernard Baruch who said he got rich by getting out too soon. I have a good solid 8% gain on the year, up over 11% since the early March lows. That's a lot of money I don't want to give back.
Even the high yield vehicles are all "stimulus related" and price-vulnerable on stock declines. We can keep them through the thin times and get the income, but our total asset values will take a bigger hit than the income received. If it were easy, no one would have any money problems. The solution is to make more than you lose in investing or trading. Buying low and selling high and getting out "too soon" sound stupid but are full of winning wisdom. A little more fear than greed also helps. I hope I can stick to plan.
Of course I could be wrong on the economic and financial fundamentals, and perhaps the Federal Reserve and Government bailouts and rebates will lead to a glorious future with the SPX over 200o in a year or two. My brain and stomach tell me I shouldn't take the risk of betting on it for too long.