The S&P 500 has rallied over the past couple of weeks by over 8%, as more and more bulls jump on the bandwagon. Bullish investor sentiment is now closing in on 90% which is quite high and indicative of a short term top. This is just another counter-trend rally in a larger Bear market. At the beginning of a Bear market, there is typically a significant number of months of heavy resistance to the downside as hope and optimism keep the markets propped up while economic indicators slowly deteriorate. Some people refer to this period as the "Slope of Hope", but once it subsides, the sell-offs can be steep and nasty.
So I think now is an appropriate time to start discussing where one should put your money to keep it safe. In a deflationary environment, there are not many stocks that will make you money. But in severe deflation (which I believe we are headed towards), all stocks will be big losers, even some of the best quality dividend paying stocks that are regarded as "safe havens". Just look at 2008-early 2009 as illustration of this. There was almost no stock that didn't sell out well into double digit percentages before bottoming in March 9, 2009. So, what good is a "safe" dividend stock paying 6-8% dividend if it loses 20-40% of its value???
You might be thinking "what about bonds?" at this point. In a normal environment, bonds would be a logical alternative to stocks, but this is not a normal environment. Debt-ridden businesses and municipalities will make even bonds a risky investment in the coming years. Municipalities and even entire states will be facing bankruptcy in the coming years as continued high unemployment and high debts wreaks continued havoc on balance sheets. Of course, there will be a very high pressure to bailout the biggest bankruptcies, but why take the risk?
Real Estate is even worse. As I have posted before (twice), real estate is still over valued and is due for more corrections. Even precious metals like gold & silver sell off in a deflationary spiral.
One word: CASH. This is the only asset class (other than shorting the stock market) that will survive unscathed in a deflationary spiral where panic sets in. If you think you can stick it out through the next leg down and keep the "buy and hold" mentality alive, you are wrong. If you thought the March 9 low was ugly, you haven't seen anything yet. The vast majority of individual investors who "hold" their assets through the sell-offs will eventually panic out near the low points in the market. It happens in every recession, but this one especially as we will see extreme lows in the market that will shock almost everyone. There are few people that will have the stomach to weather the storm all the way through, and large fortunes will be lost as a result. Don't be one of them, protect your assets NOW.
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So tell me what opinions of yours have changed since delving into the economic abyss.
I try to leave this blog as non-political as I can, but from time to time I must get at least somewhat political. (1) Government fiscal policies are destroying this country, and it's been happening for a while now. Keynesian economics is fundamentally flawed and has been proven ineffective time and time again in countries around the world. You can't spend your way to prosperity. It provides short term "stimulus" only, as it just kicks the can down the road until future generations pay the price. That day is coming very soon. But Keynesian economics fits the ideology of most modern politicians who don't understand economics, so it's a weed that just keeps growing.
(2) The stock market and economy is more predictable than you think. The economy & the market is a FRACTAL and it follow short, medium, and long term patterns that repeat over and over at all zoom levels. More on this later.
(3) The economy is driven by human behavior patterns (this ties into #2 above), or "social mood". It's a myth that the market is driven by earnings. Earnings are a by-product (or a side effect) of aggregate social mood patterns. More on this later also.
(4) there's more, but again I don't want to get too political on this blog :)
5) If you want the perfect long term (20 years) investment with little risk, OIL is your play. Between growing Middle East conflicts, extremely high inflation on the horizon, Peak Oil beginning to play out in the coming years, and booming emerging economies like China and India which will dramatically increase world-wide demand, oil prices are going to go parabolic to an extreme. I expect on the the order of $50/gallon gas or more in 20 years. However, there's no hurry since deflation will keep prices low for a while.
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