I have been busy setting up a diamond wholesale business as I feel that hard assets will continue to outperform equities for some time to come. While I like real assets including real estate as investments versus paper investments right now, my recent endeavors have been slower to bear fruit than I would have hoped and I apologize to my readers for not updating this blog more frequently in recent weeks.
Just as in a poker game, the key to winning in the stock market is understanding that the game is going to be rigged much of the time and that prices don’t always reflect real value or any sense of tangible reality. In recent weeks the markets have melted up to a substantial degree based on the European bailout ideas that levering up the system to pay interest on previous leverage would stem the current banking crisis. In other words, the domino effect of too much debt may be slowed or stopped in the short run and that has provided investors with a substantial bid for many stocks. That said, levering up SPV’s to buy debt of countries who are in trouble because they already own too much debt creates a significant moral hazard much in the way that the US created a huge moral hazard when we bailed out our largest banking institutions back in 2008. Europe’s move to bail out insolvent banking institutions is not going to solve the root problem at hand, which is poor management of public finances which is a problem shared by almost all of the developed nations in the world at the moment.
Additionally, using public money to bail out or pay for the losses of private enterprise is considered to be hard line fascism according to most historians, economists, and business people and that’s exactly what the governments of the world have decided to do to “save” the financial system.
The problem with such a “quick fix” is that these moves are inherently unstable and the system has begun to show major cracks in the foundation a debt expansionist global economy.
What all of this means to investors is that bubbles have formed and bubbles will inevitably pop. Real estate is one asset that appears less likely to remain in a speculative bubble given the fact that prices for real assets remain low relative to the increase in the US money supply.
While a debt deflation outcome is certainly possible, I believe the consequences of such an outcome will hit things like stocks harder than tangible items like farm land, rare color diamonds, raw land, timber property, etc… because of the Keynesian tact taken by overleveraged governments around the world.
In summation, it appears to me we will have to go either into an inflationary outcome or into a depression. Because both of these scenarios are politically indefensible it is likely we will see a bit of both in the form of “Stagflation.”
What worked in the 1970′s should in all likelihood continue working today. That means commodities and real estate should continue to outpace the stock market, though when valuations become cheap enough equities will once again become attractive.
At $1000 all else being equal, I view the US stock market as cheap. At that point the Hedgephone market model will switch from cash or short to long. We still like the hard asset markets, but we respect the fact that we will see continued volatility. Nothing goes straight up forever!