KFG on How to Get to the Other Side

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The Casey Conference was amazing, and if you haven’t already I highly recommend you getting the audio CD’s and giving these experts a listen (that is not an affiliate link—I don’t make any money by recommending this to you, but it was really, really informative and you won’t be sorry!).

For the past week or so I have been faithfully reporting what the experts relayed to us (many thanks to the Casey organization for letting me do so!) and I’ve more or less held off from commenting on what I think about everything, because you know I always want you to first think for yourself!

But if indeed you are wondering where yours truly stands on these issues and what I am doing to prepare for the future I see as “most likely” to occur, then today is your lucky day.  

Please please please realize, however, that I am certainly no “expert”—I am just an individual investor, like you, trying to figure all of this “stuff” out and invest accordingly. I do not have a magic crystal ball, and besides, who knows what crazy antics and schemes desperate politicians may come up with to thwart what I would think would be the “most probable” or “most sensible” course (they’ve already proven their complete lack of “sense” in any case, trying to “solve” our debt problem with more debt!). So they are always a wild card.

In any case, here we go…Kung Fu Girl’s thoughts on the economy and how to “get to the other side”!

Crisis Looms

Those of you who have been reading for a while know that I am not a gloom and doomer and am in fact a pretty darn optimistic and happy person (just count the number of smiley faces in any given post if you’re unsure about this—it’s so “unprofessional” and yet I cannot seem to help myself!).

However, I believe we are soon to see another 2008-like crisis (and yes, crash), although “soon” could be anywhere from “the next 6 months” to “the next 5 years” (never underestimate the power of politicians to kick that can down the road!).

But it’s coming.

And when it does, equities will suffer, gold and silver will suffer, various currencies will suffer, commodities will suffer…in fact, there won’t be many “safe” places to stash your money.

This could come in many forms…the “system” as we know it is based on a shaky façade of confidence, and that confidence is quickly eroding as more and more people begin to understand what a house of cards our global financial system really is.

The matchstick could be the Spanish 10-year bond hitting that magical 7% number and finally toppling Europe off the edge of the cliff into the choppy crisis waters below.

(At last glance the Spanish 10-year note yield was at 6.27% according to Bloomberg, and the “spread” between Spanish 10-year notes and German bunds is now more than 5%, a euro-era record. This is much like if you were to apply for a mortgage and your neighbor down the street was also to apply for the exact same mortgage, you would pay 3.75% and he would have to pay 8.75%!)

That would throw Europe into full-blown crisis mode (not like they are not already, but this would be worse…) and could easily trigger another global financial crisis (remember even U.S. banks are sitting on trillions of derivatives and are heavily exposed to European debt and swaps).

It could be war with Iran, although to me the chances of this happening before the U.S. elections in November are slim, because it would be so politically unpopular (I would hope…) that Obama would stand no chance of reelection.

It could be “something” happening in China…remember Lacy Hunt’s presentation where he said that Chinese total debt (including hidden liabilities) is 160% and that China’s growth target for 2012 is 7.5%…the slowest in 22 years. And Gordon Chang’s presentation where he said there is much political infighting and that China could even experience another cultural revolution.

While no one can predict with certainty exactly which event will happen first and be the initial trigger of the coming crisis, everyone agrees that we will have a crisis, and yes, that includes usually optimistic me.

This is because the worldwide debt problems are simply too large.

But what about austerity?

A few speakers said that we could possibly avoid a crisis if we could all successfully implement austerity…but I just don’t see that happening.

Austerity does work, if you can actually achieve it. But it is extremely “politically unpopular”, to say the least. We Americans are insulated somewhat from the images and videos of what is really happening around the world (although this is changing thanks to the Internet), but they are rioting in Greece, and in Spain, and in Italy, and people have died because of these extremely unpopular austerity measures. Incumbent European politicians have been ousted by new ones from new parties—no one wants “austerity” and no one is voting for the incumbents.

So, I foresee another 2008-like crisis coming…but I don’t know when.

And when it does come, I don’t know which form it will take.

Hyper-Inflation?

For example, there is much talk of U.S. hyper-inflation in the precious metals world, and while I do think this could occur at some point, I can’t see it happening first.

Right now, this insane world that we live in is “rushing to the safety and security” of the U.S. dollar and U.S. government bonds…as Jim Rickards would say, other currencies are “winning the currency war”, at least temporarily.

People are buying U.S. dollars because they are perceived not necessarily as “safe”, but as “safer” than the euro or the yen. (Obviously these “people” haven’t taken a look at our balance sheet lately…but then again, the ECB’s and the Japanese balance sheets aren’t too spectacular, either!).

So the dollar is currently strengthening, not weakening, although of course this could change at any moment (and there is no arguing the fact that the long-term trend is down, way down…it’s lost something like 90+% of its value over the years!).

Inflation?

Maybe…but then we need to rev up those printing presses some more—Spain needs another trillion euro (according to John Mauldin and Michael Lewitt) and with the dollar strengthening and deflation looming the U.S. needs QE3 (which Jim Rickards said to expect).

So in the medium-to-long-term, yes, I predict inflation.

Deflation?

Maybe in the short-term. Harry Dent gave an interesting presentation on deflation where he argued that the demographics simply do not support growth—I can report on that in more detail next week if there is interest.

Basically, his position was that the age group(s) who spend are not baby boomers entering retirement, and globally the “spending” population is declining dramatically (yes, even in China—they have some of the “worst” demographics in the world due to their one-child policy).

Countries around the world are suffering from the same phenomenon we are finding here in the U.S.—the number of workers (and spenders) is declining significantly compared to the number of retirees (who no longer spend very much and most of whom no longer work or contribute to Social Security).

However, I believe the group who says that deflation is a central banker’s worst nightmare, and that governments and central banks will literally do anything in their power to prevent deflation (we have all heard of the horror of the deflationary Great Depression, and of “Helicopter Ben’s” famous statement about dropping dollars from helicopters if needed to avoid a repeat of that deflationary scenario).

So possibly deflation in the short-term, to “convince” the population/markets/etc. that more QE is “needed”…but I then see the Fed and central bankers around the world pulling out all of the stops to avoid deflation.

So Kung Fu Girl’s eventual prediction is inflation….but getting there will be “interesting” to say the least…inflation will only occur if banks actually lend all of these dollars and euro that are created, and consumers actually spend them.

Getting this to happen is beginning to seem like more and more of a miracle each day!

What to do?

So what to do? It’s intimidating to hear all of the experts agree that “there are no bargains right now” and “the winners in the future will be the ones who lose the least”!

However, I’m beginning to think they are right—I’m not attempting to “shoot the moon” with any of my investments right now, and will be quite happy if Kung Fu Guy and I can simply preserve what we have (our buying power) over the next 5 years.

(I’ll have to update my personal story…those double-and-triple-digit returns may sadly be a thing of the past, although I will discuss two exceptions in just a moment!).

Cash

We are holding quite a bit of cash right now, and by “quite a bit” I mean 25% or maybe even slightly more.

I like cash. Cash makes me happy. Cash lets me sleep at night. But most importantly, cash lets me shop when assets go “on sale”!

And unfortunately I fully predict a “sale” in the future (although again, I certainly have no crystal ball!).

We have our cash currently about 80% in U.S. dollars, because I certainly don’t want to own the euro right now (although several of my sophisticated investor friends do own the euro, and are going to sell it if it breaches 1.20…so your mileage may vary!).

This makes sense for us because we live in the U.S.—if you live elsewhere, you likely hold more of your cash in your local currency (this really depends on where you live, though!).

We used to have a much broader spread of currencies (I love Everbank for this, by the way, if you can’t buy foreign short-term bonds) and they made up much more of our cash allocation, but lately we’ve moved slowly back to U.S. dollars.

Do I recommend this for you? No…I don’t recommend anything for you (remember, I am not a registered investment advisor, nor am I an “expert” on any of this—again I am just an individual investor trying to figure all of this out, like you!).

Gold (and some silver)

We still own quite a bit percentage-wise of gold (and some silver). This has changed over the years, because the value of both gold and silver has risen so dramatically since we first purchased it (I first bought gold at ~$800, and silver at ~$11).

We still have all of our physical gold and silver, but did sell some silver last year when it had risen so far, so quickly (I thought “no need to be greedy”…$11 – $47 is quite a return!). We used that cash to make our La Estancia de Cafayate payments, although the Casey folks might urge us to never-ever sell our silver, LOL!

We now own more gold than silver, and I am glad about that.

Gold / Silver Mining Stocks

I bought Silver Wheaton long ago (luckily!) and Royal Gold and sold off what I had invested when they doubled (yay!) so am taking a “free ride” on these.

The resource stock area has underperformed over the past year (to put it mildly), but now it is really starting to look attractive (one of the very few segments of the markets that is, by the way!). While I am no expert (and you have to be extremely careful of the geo-political environments of these companies) I believe Rick Rule when he says he is more excited about this season than he’s been in a decade.

I am making my “shopping list”, like Louis James recommends, and am watching my favorites to speculate on soon. Having learned from my previous experiences of going “all in” to a position (dumb…), I am going to average in so will be buying some over the next several months in little tranches. (You can listen to a great interview Louis gave on how to do this here.)

These junior mining stock purchases will only represent a small percentage of our total assets, however—they are highly speculative, and while extremely fun to speculate on, I will not be putting in more than say, 10 – 15% of our total net worth into these, and then I will choose several favorites to place my bets on.

And again, this may make exactly zero sense for you or your personal situation—Kung Fu Guy and I are still under 40 and hopefully (knock on wood!) have several earning years ahead of us…hopefully!

Real Estate

Well-located buy-and-hold-and-rent-out real estate could be very interesting over the next several years. If you can get a mortgage, rates are SO LOW you can lock in some fabulous financing over the next 30-years, and I expect rents will increase, particularly in growing areas with lots of jobs.

While I by no means think real estate has “bottomed”, I think the savvy real estate investor could do very well in real estate (although you’ll have to be careful of the local job market wherever you invest to ensure your tenants can make their payments!).

So I am looking around…I like real estate (not everyone does, so again your mileage may vary) and I love cash flow.  

I read an interesting article last week on real estate being a way of shorting bonds that was fascinating, too—thank you KFF Subscriber Investor Junkie for bringing it to my attention:

Does Real Estate Equal a Bond Short?

Bonds

Chris Weber recommended the U.S. 30-year Treasury last May and boy, I wish I would have taken him up on that! Despite the huge bubble looming in bonds, due to the crazy world we live in (people rushing to “the safety and security” of the U.S….) those bonds have returned something like 30%! (I will have to check his newsletter to get the exact amount). Even Porter said in 2011, if you were not willing to short stocks then he advised being 50/50 gold and bonds last year, and surprisingly, that strategy worked very well.

But would I buy a 30-year Treasury now…? I’m not so sure.

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I am going to stop there because today is Parents’ Day at the Kung Fu Kids’ school and I do not want to miss it! (It is a big deal—they put on a little show for us, and lavish thanks and praise on us…heck, the children even feed us and serve us for the afternoon—I am definitely not missing that!).  

I realize I haven’t touched on commodities (other than gold/silver) or equities or currencies (other than cash) or internationalization, but this is already 2500 words and I am sure you have your own weekend fun you’d like to get started! (I’ll continue next week if there’s interest).

Please let me know in the comments what you think and what you are doing to prepare for our uncertain future!

Do you have a plan? Are you internationalizing? Are you worried about unrest / social turmoil? Or do you think that’s just kooky?

And most of all, don’t let the doom and gloom scare you…we can always band together and form a Kung Fu Finance commune (filled with great friends and plenty of cocktails) and ride out the storm together.  

Have a GREAT weekend!

To your financial success,
— Kung Fu Girl

Tagged as: bonds, cash, deflation, economy, Europe, gold, how to get to the other side, hyper-inflation, inflation, silver, Spain