Putting the pieces together...

A Conservative (and conserving) Portfolio

Since the 2001 low, gold is up ~480% while the US dollar index is down about 38% over approximately the same period. A portfolio made in 2001 consisting of 90% $ US Tbills and 10% gold would be worth about par in 2001 dollars, pre-tax. You'll have to believe me or do the math yourself. The continously-rolled TBills would be valued in 38% devalued 2011 dollars and the gold +479% in 2011 dollars. (I wonder if this could possibly be the origin of the 10% gold portfolio allocation that has been mentioned routinely since the 1970's?) To come out ahead of ten years of dollar devaluation after tax you would have needed to have >10% in gold. In any event even with 15-20% gold and the rest in TBills it was and is a fairly conservative portfolio.

But isn't gold overvalued relative to dollars after a decade long run? I don't think so, but I can understand why some people might think so. About 10:1 gains versus the reciprocal of the dollar seems reasonable to me. It also is clear to me that if the dollar were to start a runaway decline, gold would go very, very much higher in nominal dollars. Also if the dollar were to stabilize and wander sideways, gold is unlikely to collapse since no central bank wants to repeat Volcker's 1979 game and raise rates dramatically, the only thing that would kill gold.

At the moment I have about 15% in physical gold and about 20% in "paper gold" (closed-end funds, stocks and commodity-related issues, NOT precious metals ETFs). That's a little high overall for me for "sleep-able volatility", but some of that is in option-writing funds like GGN and CFD which were added to on the recent bear raids. I may well trade back out of some "paper" on future rises.

I probably won't go to TBills, at least not yet, but as I have written recently, I have drastically cut down duration or maturites in bond funds. Bill Gross is doing the same in PTTRX/PTRAX which is my single largest position, but my new money is going into PFIUX and PTSHX which are far shorter term and pay 2.25% and 1% respectively. Not much but far more than TBills! I hope it's clear why I want to hold predominantly short term dollar assets: my inflationary views could be wrong, and I live in the US.

The Big Picture

In "old normal" times managing a retirement portfolio was a fairly easy task. There were interest rates worth investing for, and there were diversification assets that really were diverse and really did hedge one another. Even three years after the 2008 crash we still have a few of what I used to call inflation days followed by a few deflation days on and on and on. We know them now as "risk on" or pro-growth days versus "risk off" or recession days. Under such a regime we either have to trade incessantly or we must own everything or nothing. Think about it.

I've been presenting some of the more intelligent and expressive spokesmen for risk on and risk off. Please do read or re-read Sean Corrigan's extremely persuasive case for "risk on". Corrigan http://www.zerohedge.com/print/377456 demonstrates conclusively that crude goods (commodities) have been and are the leading edge in an age of emerging markets and "funny money" partly due to real and perceived growth and partly due to spillover of funny money (speculation). There is no real output gap or oversupply of labor and un-used factories to prevent inflation in Corrigan's view since previous funny money periods (2001-2005) created useless facilities and jobs which are not helpful and were not written down after the crash(es). Plus the currency risks losing the confidence of its holders in which case "all fall down" as my grandmother would have put it. He's in the "Austrian" or austerity camp.

The other intellectual approach which I call the muddle through method is favored by John Hussman and the great mass of media and economists. Re-read this one: http://hussmanfunds.com/wmc/wmc110509.htm Another recent explication by this school was featured in an interview by Kate Welling of Mark Lapolla: http://welling.weedenco.com/html/1307_LI_Lapolla.pdf Lapolla is very thorough as are Corrigan and Hussman, but he thinks that for all its faults QE and its predecessor bailouts have worked and are working, but that we will have very slow growth and no inflation. He buys into the output gap inflation-limiting belief, and he believes China will also collapse to save us from inflation. Given his views on labor and Bernanke, Lapolla is clearly in the democrat and Keynesian camp.

I am quite clear in my mind that these three are each selling something besides their ideas, but their reasoning is logical and lucid. We cannot invest now without some overview. It may not matter much who is right to a 25 year old professional just beginning to invest. But for those close to or in retirement it means everything to be right. Take some time to read these three articles.

Abandon Hope All Ye who Buy and Hold Financial Assets

The sign on the Gates of Hell in Dante's Divine Comedy warns all who would or must enter that it's hopeless down there. Far, far less serious but still very frightening for investors for the next decade is John Hussman's recent ten year projection for bills, notes, corporate bonds, Treasurys, and stocks. http://screencast.com/t/3mAAusLsig

The chart's X-axis runs left to right from least risky (TBills) to riskiest financial asset (stocks). The Y-axis is the nominal (current dollar) annual rate of return to be expected from each asset class. Each colored curve is for a different important starting date. It is generally expected by investors that decade-long returns rise with risk taken, as the colored lines for August 1982 and March 2009 promised. But the curves for March 2000, August 2007, and May 2011 are quite different.

The projections from just now for the next ten years are shockingly meager across the risk spectrum just when many millions of soon-to-be retirees are hoping for much larger returns. Inflation of 3% and taxes would totally erase projected returns of 0-3.5%! Buy and hold specific assets and you will lose overall under almost all plausible inflation/deflation scenarios.

Some implications for coping with 3.5% annual returns are needing someone to trade for you (fund or trust), learning to trade for yourself, or keeping it all in TBills just to preserve nominal dollar value. No mix of financial assets will guarantee greater gains overall, although the very modest gains may be different at different times in each asset class. Hussman doesn't discuss inflation in detail, but clearly it would wipe out a traditional balanced portfolio under his projection. Even a typical Harry Browne portfolio with 25% each in bills, bonds, stocks, and gold would have a hard time. But before we get too far into portfolio construction for this future, let's be sure to read and understand it completely: http://hussmanfunds.com/wmc/wmc110509.htm

CAROLAN NAILS SILVER!

Due to lack of sleep and time I failed to witness Christoper Carolan's absolutely spot on nailing of the silver high. Carolan invented the Spiral Calendar ® method of market timing and explained it fully in his 1992 book, The Spiral Calendar, still in print and available at his website. (See the Blogs I Like list in the left hand border, down the page.) My site is totally non-commercial with no cookies set and no ads or deals, so if recommend something I have paid for it, own it, and really find it useful. Check out Chris's site if you haven't already.

Also both he and Terry Laundry, who uses another method of timing and is also on my list, have June 11 as a probable significant timing target. Of course neither of these worthies is correct 100% of the time, but but both are right amazingly often.

What's Mr Kondratieff Saying?

Regrettably Mr Kondratieff died in the vicious Stalinist purge of nonconformists in the 1930's. But his long economic cycle lives on and remains dominant in the world economy. Unfortunately he has been condemned to obscurity again, this time by those who misunderstood, misused, and marketed their own "intellectual" products on his name. Most analysts who still apply the logical implications of his work no longer mention his name as it has been cheapened by multiple marketers of junk economics.

But just this morning I read a brilliantly-written report by Sean Corrigan of Diapason Commodities which is as good an explanation of Kondratieff long cycle moves of interest rates, commodities, and stock equities as you will find in the dumbed-down 21st century. http://www.zerohedge.com/print/377456

Corrigan is a master of the English language in all its beauty and style! He does not mention Mr K by name, but he explains thoroughly how and and why interest rates, commodities, and equities are now and have been trading together or against each other, and why we are in a longer term worldwide commodity bull market.

Corrigan pretends to be a wee bit baffled by the "running together" of commodities and stock equities. Mr K would say that equities part company with commodities when commodity prices get "too high" and when interest rates also get "too high". The classic example within living memory was the 1965-72 rollover tops in equities as both commodity and interest rate pressures became too great for sustainable real corporate earnings growth.

Of course we now have a cabal of cretins at the wheel of government finance who will not allow rates to rise, and who cannot understand that keeping rates down increases what were already inflationary pressures for the past decade. Corrigan properly excoriates the cabal as comparable to a major traitor of the 1940's in their drive to destroy the value of the US dollar.

Corrigan's report is one to print, bind, put on your bookshelf, and read many times.

IS IT MAY YET?

As opined a week ago, the overbought rallies of commodities and stocks into the normal seasonal summer downturn time have skidded a bit and turned south. Always mercurial silver is doing its best to claim the ugliest prize, being down about 20% in four trading days.

Only the much maligned Treasury bond is rallying on FED QE3 buying and "safe haven" switches. So far the US dollar has not rallied. The Swiss franc seems to have replaced both gold and the dollar as the real safe haven of choice.

If this really is the start of the summer doldrums, we have time to relax and wait for bargains. We'll know in a few days if commodities and stocks are done until late summer to fall. Sometimes May sees pullbacks and one last rally into July for the yearly high.