Investment strategies in the current economy

[catnipdipper]

I would go visit FP40 Motorsports in Connecticut and see Wayne Carini.
Invest in Collector cars and let him manage them for you. He partners up with some others from time to time to fund a purchase and then sells them at auctions around the country.

Check him out on his site or watch HDTV show Chasing Classic Cars.

You drive them and then you sell them.

[WTF]

Originally Posted by pjorourke

I know this will sound strange, but I agree with WTF. Higher education is the next bubble.

Originally Posted by Rudyard K

Such billiance.

[pjorourke]

Don't get too excited WTF. Even a blind squirrel occasionally finds a nut.

[macksback]

People always make money in good times and bad.The advice given earlier about buying grade A whatever is true.

[TexTushHog]

And extremely tough question. First, I think you want to get out of European assets in fairly short order. Europe is headed for the a Depression, I suspect, or at the very least a bad double dip recession where the second dip is worse than the first. Heretofore, I was bullish on European bonds, but over the past three to six months, I have become much more pessimistic as European government pull back on spending and commit demand side suicide.

I generally agree with Rudyard K that asset preservation is at least as important as growth now. However, the question is what to preserve your assets in. Treasuries are an obvious answer, but they yield about the same as burying you money in a mayonnaise jar under your back porch. Very high quality U.S. corporate bond may offer some help. I would avoid Muni's unless they are pre-funded and have relatively short maturities.

I think fairly large U.S. stocks may fare decently in the very short term. But once Europe goes down, the contagion will inevitably spread here. The real question is how quickly Europe will react to their predicament and reverse course at start stimulus spending.

Meanwhile, I'm still relatively bullish on BRIC countries, especially if you split out oil and gas investments in Brazil and Russia. Of these countries, India and China are where I have the heaviest exposure. Also S. American has some decent plays outside of Brazil. I think their economies will remain relatively stable. I especially think that there are continuing opportunities in Peru.

[Texas Contrarian]

In my opinion, U.S. equity markets are extremely vulnerable, although they may very well be floated a little bit higher over the short term by massive amounts of new quantitative easing (QE). You might note that over the last 18 months or so, the Federal Reserve has increased its balance sheet by about $1.5 trillion and bought all sorts of agency debt, Treasury issuance, and MBSs.

The QE2 is set to sail soon! It's expected that the Fed will soon start purchasing hundreds of billions of dollars of additional fixed-income assets.

One of the points of all this money-printing is to prevent the real estate market from collapsing further. (Many mortgages are priced off the 10-year T-note rate, which has been shoved down to about 2.5% by the expectation of further QE after the Fed's next announcement in 2 weeks.) Another goal is to reflate the market for risk assets by disincentivizing savers and investors from holding assets that earn virtually no interest. There's great pressure to keep asset prices up, since severe funding problems loom for both public and private sector pension systems, and equity valuations undergird their solvency.

Note: Another fact that should be lost on no one is that QE will also partially serve as another bank bailout. There's obviously no way in hell to get another big TARP through congress, but the next best thing is to have the Fed buy shaky MBSs from bank portfolios. That's part of the deal. (To whose drums do you think the Federal Reserve marches?)

I believe it's of great importance for anyone serious about investing to make every effort to understand this issue and track developments, since it has great import for the economy and for your assets.

Rudyard K offers the excellent advice that perhaps the most important consideration in turbulent and uncertain times is to preserve your capital. I also like his advice on MLPs, and own some myself. He also notes that although it may be well down the road, significant asset inflation may occur as a result of central bank money-printing in the U.S. and elsewhere. You will then want to be positioned in a variety of commodities and other real assets to protect yourself against severe dollar debasement.

Like TexTushHog, I'm fairly bullish (long-term) on the BRIC (minus the "R", anyway!) -- domestically, about the only thing I would recommend unreservedly is large integrated oils, the Exxon Mobils of the world (and its competitors). Even a safety-first investor can sleep well owning such assets. The downside risk is low, the issues pay a pretty decent dividend, and dollar debasement is very likely to drive oil prices significantly higher in coming years. Besides, you never know when the next geopolitical blowup will occur in places like Iran, quickly spiking oil prices much higher.

TexTushHog, the last thing in the world European countries need to do is engage in more "stimulus spending." Excessive increases in spending is how they got themselves in so much trouble in the first place! The UK, for example, clearly does not want to go the way of Greece and has resolved to undertake a wide range of politically difficult spending cuts. Unlike our policymakers, theirs are finally becoming serious about fiscally responsible government.

In the meantime, we've been doing the opposite of what we should have been doing on the fiscal front, and the Federal Reserve will eventually have to unwind its balance sheet and mop up large amounts of newly-created liquidity. Until there's some clarity on those fronts, the outlook for the U.S. economy will be very uncertain, to say the least.

[Camille]

Originally Posted by TexTushHog

And extremely tough question. First, I think you want to get out of European assets in fairly short order. Europe is headed for the a Depression, I suspect, or at the very least a bad double dip recession where the second dip is worse than the first.

What do you mean by Europe TTH? Are you referring to countries in the European Union or just all European countries?

Camille

[WTF]

Originally Posted by CaptainMidnight

-- domestically, about the only thing I would recommend unreservedly is large integrated oils, the Exxon Mobils of the world (and its competitors). Even a safety-first investor can sleep well owning such assets. The downside risk is low, the issues pay a pretty decent dividend, and dollar debasement is very likely to drive oil prices significantly higher in coming years. Besides, you never know when the next geopolitical blowup will occur in places like Iran, quickly spiking oil prices much higher.

Me thinks that was the kinda of advice she was looking for and spot on IMHO.

[Rudyard K]

I am not as well versed internationally as some on here appear to be...so I can't speak much about the rest of the world.

But the key to remember "domestically" is the "Given the moral will to survive financially, the Fed has the ability to survive financially". Unlike a guy who makes $50K per year and cannot service his credit card debt, his car note (and he is underwater in his car), his mortagage (and he is underwater in his house), and his current operating expenses. That guy is financially dead...even though he may not admit it yet.

Our Fed has vast, somewhat untapped, wealth with which it can pay off its debt...if it chooses to. It will be very politically difficult to do so...but the ability is there nonetheless. As few examples...there are federal buildings all over this country...there are national forests and national parks...there are vast federal lands...there are miliions of acres of minerals owned by the Fed. Selling these would and could most certainly offset trillions of dollars in national debt. The "tree huggers" will be up in arms about doing so. But if people are going hungry...they are going to be a lot more interested in eating the fruit that falls off the tree than looking at it.

My point is not that such a sell off is "How" we will accomplish coming out the other side of this...but only to demonstrate that given the will to do so, we "can" come out the other side of this. As such, wringing one's hands and screaming that the sky is falling solves nothing. Planning for survival, is the best way to survive.

[atlcomedy]

Originally Posted by Rudyard K

Unlike a guy who makes $50K per year and cannot service his credit card debt, his car note (and he is underwater in his car), his mortagage (and he is underwater in his house), and his current operating expenses. That guy is financially dead...even though he may not admit it yet.

.

The reality is for a large segment of the population the discussion isn't about which asset classes to be in but how to "restructure" the personal/family balance sheet (with or without the help of creditors). This goes for people making $500K as well...

The macro concern I have that no one (or few) is talking about is the sharp contraction in demand once everyone restructures their balance sheets...that is the guy making $50K is now actually living on $50; not $75 or $100K like in the old days. This contraction will cut across all sectors, not just housing.

[FLWrite]

Originally Posted by Camille

..but an investment nonetheless. Education.

...

C

Yep. This. First. Always.

Next, we remember that while volatile economies necessitate changes in strategy, which was the original poster's question, economies should not, for long term investors, dictate changes in the fundamental rules. Rules (that should never have to be repeated but for the majority of Americans, they do...) such as:

1. No debt on depreciating assets.
2. Above all else, protect your principal.
3. Diversify. A little bit of a lot beats a lot of a little.
4. Don't invest in what you don't understand. Life is too short.

[Rudyard K]

Originally Posted by atlcomedy

The macro concern I have that no one (or few) is talking about is the sharp contraction in demand once everyone restructures their balance sheets...that is the guy making $50K is now actually living on $50; not $75 or $100K like in the old days. This contraction will cut across all sectors, not just housing.

Exactly!! I'm not sure how it is measured, but I saw (the other day) that the savings rate had increased to 6% from 3% here recently. But the long term savings rate had historically averaged around 9%. Now I'm not sure I know what that percentage really means...but I do know that it means that there will be less money flowing around the system to create jobs. Balance Sheets will start to look better...but revenue will (in total) be less.

The pie will perhaps be more nutricious...but it will definately be smaller. That's going to leave a lot of people without a piece of pie.

[Texas Contrarian]

Originally Posted by atlcomedy

The macro concern I have that no one (or few) is talking about is the sharp contraction in demand once everyone restructures their balance sheets...that is the guy making $50K is now actually living on $50; not $75 or $100K like in the old days. This contraction will cut across all sectors, not just housing.

Originally Posted by Rudyard K

...I saw (the other day) that the savings rate had increased to 6% from 3% here recently. But the long term savings rate had historically averaged around 9%. Now I'm not sure I know what that percentage really means...but I do know that it means that there will be less money flowing around the system to create jobs. Balance Sheets will start to look better...but revenue will (in total) be less.

Those are both good points and in my opinion cut to the heart of the imbalances our economy faces today.

The savings rate was indeed reported to be around 6% recently. That's just a snapshot in time (it's always a moving target and a little difficult to measure). But I believe most observers think that after they report the next string of several-month moving averages you will see that the household savings rate is in the mid-single digit range. That's up from several years of near-zero reports.

By contrast, for several decades following World War II the savings rate tended to be around 10%. Consumption was a lower percentage of GDP, but we were a manufacturing and exporting colossus, and we were the world's largest creditor nation.. But just look at us now. It's sad and pathetic.

We are the largest debtor nation in the history of the world and we have a balance-of-payments deficit approaching $500 billion annually. Much of it goes for goods imported from China and for imported oil which we promptly burn up. In the meantime, we don't export nearly enough.

The Chinese print renminbi like crazy and the PBOC buys massive quantities of dollars so they can keep their side of the dollar/yuan pair undervalued by 30-40%, thus gaining a huge export advantage. China is the largest and most aggressive mercantilist power in the history of the world.

We need less debt-fueled consumption and more savings, investment, production, and exports. I don't believe for a minute that we'll ever have a sound recovery until we begin moving in that direction and rebalancing our economy in a sound manner.

The getting there is what's going to be tough.

It's so much easier for politicians to say, "Free ice cream for everybody! The fat kid down the street will eat your broccoli for you."

[TexTushHog]

Originally Posted by Camille

What do you mean by Europe TTH? Are you referring to countries in the European Union or just all European countries?

Camille

Basically all of Europe. Their budgetary retrenchment is the absolute wrong strategy at the wrong time. Just like Hoover before the Depression. The worst thing you can do in times of economic down turn is trim government spending, must less trim it drastically like so many European countries are doing. It's a recipe for disaster on a huge scale. And to the extent that smaller countries are not participating, I think it would be hard from them to isolate their economies from the contagion. It's like they've completely forgotten the lessons of the Depression. If the Europeans think they have trouble paying off their debt now, let's see them try to do it with their GDP cut by a third or more.

[pjorourke]

Yeah, it makes much more sense to start a new multi-trillion dollar entitlement that can help government spending grow out of control. Also, you should drop about a trillion of public money on your buds too.