When others are greedy, it's time to be fearful. When others are fearful, it's time to be greedy. -
The above quote while stated so eloquently by Warren Buffett, speaks of an investment philosophy which has been around as long as the capital markets themselves. It is nothing more than the contrarian approach, stated so as to make it sound like some well thought out philosophy. There have been other great Value Managers, Warren Spitz, David Dreeman, David Williams, to name a few. All of them have told us for years that emotion is the enemy the successful investor.
Look at what the current national sentiment is, then do the opposite thing, is more often than not better advice than jumping on the latest bandwagon and listening to all of the well thought out reasons why this time is different than every other moment in our world's history. As our nation's most famous and least useful stock index flirts with setting new record highs, bear in mind that we've all seen this movie before. This time is a little different than most however. The magic rocket flight experienced in our nation's capital markets is due in large part to the single largest currency manipulation in world history. Those debt monetizing activities so euphemistically labeled Quantitative Easing I, II, and III, have created an environment where two simultaneous bad conditions have led to an entire nation dawning rose colored glasses. (I about fell off my chair when, during the latest Presidential version of a beauty contest, Mitt Romney stated that China was guilty of manipulating their currency. I forgave him during the campaign for this disingenuous moronic position, but now that things are over, China's manipulation of her currency is only their amateurish reaction to what we've been up to. Seeing as how they stand as our largest single creditor, and we their largest single credit customer, what choice did China have?)
Those two conditions are as follows. One, our dollar has become devalued, and while inflation of about 3.1% per year is considered a normal condition, our devaluation of currency has been far greater than that in recent years, and it has been spurred on purposefully. By robbing us of the value of the property already in our hands, our government has been able to fund their ill conceived adventures, for instance teaching Chinese Hookers how to hold their liquor. to lend a little perspective, it takes one dollar to purchase the commodities that 56 cents could buy only four years ago. While it is true that products not directly connected to commodities have not yet caught up to that sad state of affairs, they will at some point in the future, follow suit. Presidents you see, do not have the authority to repeal the laws of simple economics. Those wonderful stock prices are not so much an increase in the value of America's businesses, so much as they are the devaluation of the currency being traded for those shares.
The second condition, which is the most dangerous and the least advertised is this. Quantitative Easing does not refer solely to the printing of currency, which is bad enough, but also how that currency is integrated into our national economy. What makes this so pernicious is how that integration is accomplished. It is done in a way so as to fool us all into believing that there's nothing to be angry with. Let's not forget that during the days of the Confederacy, (this refers to a time before our Constitution and not to the attempted secession of our Southern States,) three states used tobacco as their official currency. Since anyone with half a brain began growing tobacco, the currency did not take long to devalue. People began soon enough burning their neighbors fields, and it became a capitol offense to harm somebody else's tobacco crop. That's right, killing tobacco was dealt with by hanging those who got caught. (My, how times have changed.) Not wanting to face the inevitable pitch forks, and wishing for that eventuality to be held off until they are long out of office, our current group of geniuses have devised a plan where bye they sneak their ill created shares of our wealth into the economy by purchasing items offered in our capital markets.
Since this is a little sneaky, and a little complicated, it will require some explanation. When the government prints out a new bill that was not created for the limited purpose of replacing an old one, they are not simply spending it as was once the practice. The lessons of the 70's told them that much. They are taking that currency and using it to purchase the bonds that they issue, buying up or paying the interest on their own debt. Then, they are taking those instruments, and selling them at the weekly bond auctions. This has the effect of driving up the prices of bonds, since now the people who are prone to buy those instruments have competition for the bonds that they did not used to have, ie the very same government who created them in the first place.
Investors, not being idiots, are far less likely to pay good money for crap instruments, like worthless government bonds which have severely inflated prices, so they must find other places to invest. Every rung on the ladder will eventually be inflated by this process, until even the Dow Jones 30 gets its share of the bubble. the problem of course is that bubbles burst, and when they do, we'll see the same talking heads on our televisions stating that the world is once again ending and this time is different, unprecedented, and there will be no way out from the wilderness.
That leaves us with a where do we go now scenario. Equities, even with the huge bubble being created once again thanks to government malfeasance, remain the single best hedge against the looming inflationary symptom that will one day soon be felt, which is rampant increases in the prices for goods and services. Commodities funds within your 401k's and annuity sub accounts are also a good play for small portions of your holdings. The same can be said for real estate funds, REITS and other Direct Participation Programs. Don't fall for the allure the gold and silver only crowd offers, but recognize this for what it is, which is making a commodity play where only one commodity is used, rather than diversifying. That one commodity by the way, unlike every other commodity traded in the Chicago Mercantile Exchange, has zero other uses beyond being a pretty, shiny, metal.
Don't panic, but our neighbors will be reaching for pitch forks and torches soon. when they do, bear in mind that we've done this before in our country, and we've come through it O.K. I've never been a fan of gold only investing. While I'll admit that taking up to 5% or even 10% of a portfolio with a commodities play may be beneficial in light of what's about to happen next, shotguns, ammunition, and canned goods will at least be useful. Gold will just be too damned heavy to lug around.