On The Buck

Over the long term, you are more likely to fool yourself than others.

–Taleb

I’m having a casual conversation about investments with another guy when the Superzipper arrives and seats himself in between us. Leaning into my space, he shoves a picture of his 60 foot yacht in my face. “Fifty-six thousand hours at $2-3 an hour in China to build it. It’s beautiful. We brought it down with us, but I’m leaving it here-we’re going to Turkey. Then we’re going to New Zealand,” he says, pausing now to allow me time to do the mental math on his conspicuous consumption.

Continuing the conversation with the first guy, I say, “We’re not invested now, just accumulating cash.” “Cash? Why cash?” interjects the Superzipper, as though my comment were a personal affront to him. “Why not land? Why not gold? Long term, that’s how you get ahead.” “You might be right,” I say, reckoning that arguing with him would be a tiresome chore. It’s Tuesday morning, we’re at bible studies, and I’m reminded that G.K. Chesterton said love means to love that which is unlovable; or it is no virtue. So I am going to love my braggart friend, no matter what.

Besides, I’m used to it. As an investor, loving the unlovable is what I do. Especially when the crowd is so in love with stuff they own it with  borrowed money. I want to go the other way. The stock and real estate markets, my favorites, are as borrowed up as I’ve ever seen them.

Stare at this chart for a minute:

NYSE-investor-credit-SPX-since-1995-inverted

The market, per the chart of the S&P 500 Index, is shown upside down, so we can correlate the peaks with levels of borrowing. There hasn’t been this much borrowing since the top in 2000. It’s worse now, because this has been a technically weak rally, and the next crash will be more severe. I will wait for the cycle lows in 2016. A fully sold out market will be cheap enough to be yielding 15-20% in dividends. The crowd will hate stocks and  want cash. I’ll give ’em mine.

Now look at real estate:

residential real estate debt

As the deflationary depression takes hold, asset values will head down steeply, but the debt will remain. An oppressive overhang of debt, together with a very big supply of homes coming on the market from hedge funds that bought heavily in ’09-’10, expecting  a recovery that never really developed,  will bomb the market and create generational values.

As for gold, I don’t like it:

Gold nov 2013

It is a trading vehicle. It looks to be in a bear market, but even if it is bought cheap, it doesn’t produce income, so you have to sell it profitably to make a return. Inflationistas and hard money guys claim it is the only defense against virulent inflation. It’s not. A good real estate property, bought when the market is low, can produce rent and, if inflation is high, the owner can raise rents and pay off a mortgage with cheaper dollars. My Argentinian friends have done this successfully for generations.

So, we hold unloved dollars:

dollar sep 2013

As bear markets take over around the globe, the scramble for dollars will push the buck up, giving us a leg up when it’s time to get into the stuff the crowd no longer loves.

Cheers,

Rod

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

 

 

This entry was posted in On Markets. Bookmark the permalink.

Comments are closed.