Wednesday, July 15, 2015

The World Ends Every Twelve Years

One of my readers sent me a link to an article and a video that predicted the end of the financial world as we know it. Although this particular prognosticator has a dubious track record, many of the facts he presented were accurate. Then his speculations moved on to a perfect storm that would result in a 50% drop in the stock market, a 40% drop in the value of American real estate, and hyperinflation that would peel off 30% of the dollar’s value—ALL IN A SINGLE YEAR! Then it would get worse. Of course the reader’s only chance at salvation could be found in the pages of his subscription newsletter.

I have stated that our economy is ultimately a castle of debt built on a foundation of thin air.

Historically, paper money reverts to its intrinsic value, zero.

In my darker moments I have even speculated that a once in a millennium world wide financial crash would be a perfect setup for the appearance of the Antichrist.

It is unlikely but possible that the end is near. What is more likely is another major correction such as occurred in 2008. These come along every 12 years or so. I have been expecting this to happen for about two years now. The market is juiced with funny money from the Federal Reserve. The Shiller PE index is dangerously high. By lowering interest rates to unnatural levels, the Fed has essentially recapitalized the banks at the expense of the small saver. The money that should be in insured Certificates of Deposit has gone off chasing returns in risky stock market speculations.

The market may continue to go up for a few more years or this bull market might end tomorrow.

If you choose to invest in the stock market, you must decide in advance, that you are willing to loose half of what you put at risk in any given year. The American investor lost about 40% in 2008-2009. That is why no sane person is ever, “all in.” When the prices crash that is the time to buy more shares. The stock market has always recovered from these crashes and then gone on to higher levels in terms of real dollars.

This is why relatively safe dividends are so important. If your shares are producing a steady stream of income, their instantaneous value at any point in time becomes much less important.

How I choose to diversify between cash, fixed income instruments, equities, and real estate is a decision I can control. I try to plan, knowing I can not predict the future.

As Solomon observed:
“Ship your grain across the sea;
after many days you may receive a return.
Invest in seven ventures, yes, in eight;
You do not know what disaster may come upon the land."

I can't control what politicians choose to do to our economy. Ultimately, if they want to destroy me, I am destroyed. I try to do my best, the rest I must leave in the Lord's hands.

Anytime anyone is selling anything by appealing to fear or greed I am suspicious. There are reasons to be concerned. If you want a better understanding of why you should be worried and a bit cautious, I would suggest the writings of John Hussman, an extremely erudite fund manager, responsible for the well being of several billion dollars entrusted to his care. He isn’t peddling snake oil.

Here is a link to his weekly market column:

Hussman Funds Weekly Market Comment

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