Wednesday, March 9, 2011

Modern Investors in Search Normal Markets


By Bill Bonner

Reckoning from Baltimore, Maryland...

Rope a dope.

Want a winning investment strategy? Find out what the dopes are doing with their money. Do the opposite.

Some investment advisors are smart. Some aren't. Some are mavericks with original, interesting ideas. Some just read the paper and do what everyone else is doing.

Last week, we got an advisory letter from one of the latter...one of the dopes. We read it carefully; if he were pointing investors in the same direction we are going, we'd have to change course.

But no! He urges investors to buy major US stocks and to sell gold. Gold is "overpriced" he says.

What a relief. He still has no idea what is going on; he thinks things are getting back to "normal."

And wait. Here's James K. Glassman, writing in The Washington Post. His piece is entitled, "The Modern Investor."

What's the modern investor supposed to do? Put half your money in stocks. The other half in bonds.

Wait a minute... Is this the same man who came out with "Dow 36,000" in 2000 - the year the stock market peaked out? It is? Well, great! That does it for us.

We don't want to be a modern investor. We don't want stocks or bonds. We'll stick with being an old fashioned investor and stick with our program: Sell stocks on rallies; buy gold on dips.

Headline in The Financial Times on Friday:

"ECB hint on rate rise jolts markets."

The European Fed said it might raise its key lending rate in April. The euro rose sharply...the Dow fell 88 points. Gold rose $12.

The case we've been making is that the ECB can't "normalize" interest rates. Neither can the Fed. In Ireland, most people have floating rate mortgages. If rates floated up to market levels, the Irish would sink. They can't afford higher interest payments.

The situation is the same for the Irish government. At market rates - 9% or more - it will go broke immediately. So, it looks to the ECB, the IMF, and the World Bank...and every other possible source of below- market financing...to meet its budget needs.

And the US? Ditto!

Historically, which is to say for the last two decades, the average rate of interest on US 10-year Treasury notes is about 5.7%. You'll notice that that's a bit more than the 3.5% the Treasury is paying now.

And then you can do the math. Nah, we'll do it for you. Imagine that the whole of the federal debt was financed at 5.7%. The total bill would be about $800 billion per year - or more than a third of total tax receipts. Of course, much of the debt is fairly long-term...so it won't have to be rolled over tomorrow. And much of it is held by the government itself...

But you can imagine what would happen to the bond market.

And imagine what would happen to the stock market if interest rates went back to 5.7%?

If interest rates returned to "normal" stockholders and bondholders would lose trillions of dollars.

What's more, there's no law that says interest rates can't go higher than the recent average. Suppose they went to 18% - as they did at the end of the '70s? Suppose the whole of the federal government's debt were financed at 18%? Then, guess what, the total interest charge would be approximately equal to 100% of tax revenues.

Well, you can imagine how long that would last. Not a single minute. The whole system would fall apart long before it came to that.

But you see what we mean? Normal is out of the question. Grotesque. Weird. Strange. Extraordinary. Perverted. That's the financial system we have. And that's the financial situation we'll have for a while longer...until it finally blows up.

At least, that's our theory.

No recovery. No "back to normal." No exit.

If the feds try to exit from their twilight zone policies they're going to hit a bridge abutment. Markets will crash. The economy will go to pieces. Unemployment will go up. People will point fingers and accuse them of exiting "too soon."

We saw, too, editorial opinions already stating that the ECB was "trigger happy"...and urging the Fed to avoid following its lead.

No worries on that score. Here at The Daily Reckoning we put the odds of an exit at zero.

The economy now depends on cheap money. It can't survive without it.

And more thoughts...

"That's one of the big differences between the French and British aristocracy," Elizabeth enlightened us. "The French aristocrats were encouraged to move to Versailles and take part in the life of the central government. They may have owned vast estates in Normandy or Aquitaine. But the real action - social as well as political - took place in and near Paris. So, they lost contact with their sources of power...their "terres"...their family strongholds. When the revolution came, they had no local support. Their peasants turned against them. Many lost their estates and their heads.

"The English aristocracy, on the other hand, tended to be jealous of its local rights and privileges and stuck close to its land. They were never so cut off from the local people and never so dependent on the court of St. James in London. That was part of the reason they evolved a different, more decentralized system of government with more emphasis on individual rights and limited central power. And it's probably why there was never any popular uprising against them."

Lesson? If you want to keep your head, stay close to your roots...your base...and your family stronghold.

We never concluded our rambling comments on the importance of a Family Stronghold. So, we'll continue...

It's one of the things we recommend for our members at the Bonner Family Office. You need roots...a sense of being connected...a refuge from the outside world...a place where your family is safe and sure of itself. As our old friend Gary North says, you need a place where you can "dig in."

In earlier reflections on the subject, we noticed how, as society becomes wealthier, each part of it becomes more dependent on the others. Today, very few people can survive on their own. In developed countries there are few subsistence farmers left. Very few could people live for more than just a few days if the sophisticated system of production and distribution were interrupted. And yet, it seems very unlikely that the system won't be disrupted. War, revolution, Internet bugs, real bugs, bankruptcy, hyperinflation...there are so many things that could go wrong, it is hard to believe that at least one of them won't.

In light of this, we urge members of our Family Office to have a place where the family can run...hide...and survive.

Where? The best place is a farm...a place not too far from where you usually are...easy to get to...and stocked with enough food and water to keep you going for a few months. Best bet is an old-fashioned pantry full of canned goods, chickens in the hen house and a pig or two in the sty.

Here in Maryland, your editor has not completely followed his own advice. He has a country house in Maryland, for example. But has no animals...and has never gotten around to stocking anything more than firewood and wine. How long can you survive on Bordeaux? We don't know, but in case of a total breakdown, we intend to find out.

Does this sound alarmist? Paranoid? Nutty?

Maybe. We are so accustomed to thinking that everything will work out fine. It always has...at least in our lifetimes. But everything doesn't always work out fine. There are, remember, a few black swans as well as many white ones. Those black swans can be nasty. And it only takes one to wipe you out.

Here's one way to look at it... A bolt-hole of your own is like an insurance policy. Maybe you won't need it. But if you do need it, you'll need it very, very badly.

Of course, if an asteroid strikes the earth...or the Yellowstone volcano blows up...or if government goons go through the countryside, as the Soviets did in the Ukraine, torturing peasants to find out where they had hidden grain...even a family farm of your own may not save you. But in the case of many other calamities, it might make the difference between life and death.

"You're just looking at the negative side of it," adds Elizabeth. "On the positive side, a family stronghold can give you a richer family life. You need a place that gives your family a sense of identity, unity, and stability. Generations come and go. But places last. A place gives a family a sense of permanence too.

"Family strongholds help families develop their own culture...their own resources...their own histories. They are good places to get the family together for holidays...for reunions...and to help family members learn to work together. They're places that you remember...no matter where you go...or where you live. They're places where grandparents live. Where family portraits and family papers are stored. Places you think about. And, I know what you would say; they're the places where you bury your gold.

"A family stronghold...or a refuge...is a also a good place to retreat...to recover...and to think. It should be fully paid for, of course. You don't want to have to worry about it. It should be a real stronghold...where you're safe. And where you're happy. So, if you lose your job, for example, it's a place where you go back to...to take time to think about your next move. Or, if you wan to write a book...or invent a new computer app...or just try to figure out what's going on in your life, a family stronghold is a good place to do it. It should be quiet, tranquil, and protective."

Your editor's family recovered its family farm in Maryland last year, after spending 15 years in Europe. The place was a mess - overgrown with trees and bushes, with fallen-down fences and grown-up fields...cracked and rotting shutters on the house...and barn roofs that you could see daylight through.

Almost every weekend since, we've spent fixing the place up. Sometimes just Edward (the last child still living with us) would be available to help. Sometimes one of the other boys would come home for the weekend. Occasionally, the girls would be able to help out too. And sometimes - such as Thanksgiving weekend - we had the whole family outside - pruning, clipping, digging, raking, nailing...

It is a great thing when you can get the children to help. There's nothing quiet or tranquil about it. The noise of chainsaws and old, diesel tractors.

"Hey, don't hitch it up that way..." "Wait, we're not finished..." "You bent the nail..."

The kids often disagree, tease each other...and fool around. They have their own ideas. Their own programs. They laugh. They joke. Progress often slows. Still, it is always heartwarming to watch them work.

Regards,

Bill Bonner
for The Daily Reckoning

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