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“Euphoric Inflation Insanity. Buying U.S. stocks because the Fed says it will proactively debase the U.S. dollar is like sitting on the beach in order to get a great view of an incoming tsunami. Any pleasure so derived should be short-lived, when the terror of underlying reality quickly takes hold.
If one were to view movement in the price of gold as a surrogate for anticipated inflation, for example, the issues begin to come into focus…
While stock prices do tend to rise in an inflationary environment — where revenues and profits are inflated — rising stock prices do not always stay ahead of inflation. On a constant-dollar or real, inflation-adjusted basis, stocks go through bull and bear markets, just as they do otherwise. If prices do not stay ahead of inflation, investors lose value in terms of the purchasing power of their assets. The equity markets may rally in the upcoming inflation, but the systemic implications and current gold behavior suggest that the circumstance will not give investors a positive real return…”
“Commentary Number 329: Inflation, Retail Sales, Trade Deficit and Debased Money”
John Williams’ Shadow Government Statistics, 10/15/10
Not since The Great Depression have there been such Formidable Challenges to those who wish to Profit and Protect their Wealth.
If it was not clear before 2008, the Fall, 2008 Markets Crash, Credit Freeze, and Financial Institutions Collapse made it clear, that we have entered into an Entirely New High Risk Era in the Economy and Markets.
Several Time-honored Investment Strategies and Techniques have been Entirely Discredited and Serious New Risks, including The Threats of another Market Meltdown and Hyperinflation resulting from increasingly Massive Quantitative Easing (Q.E.) abound.
For example, as we explain in greater Detail below, the formerly widely accepted “Rule” of “Buy and Hold” has not only been largely discredited – the Major Equities Markets are Trading about where they were a decade ago – but also have caused typical “Buy and Hold” Investors to Lose Money over that decade, at least 30%, when adjusted for Real Inflation (see below).
Facing these Challenges requires careful Attention to Goals and Strategies.
On the other hand, These Challenges Provide Great Opportunities for Profit, while at the same time Require Great Vigilance to Avoid Wealth Destruction.
Allocating one’s Investment and Risk Capital among three separate Portfolios as Deepcaster recommends, each employing a somewhat different Strategy, is an excellent way to Maximize Opportunities for Profit and Avoidance of Wealth Destruction.
A Primary Overall Strategy is first to seek “Beta” by Investing or Speculating to achieve Profit from Broad Market or Sector Trends (Beta), whether Uptrends or Downtrends. We seek Beta above all, because even the strongest individual Securities are often vulnerable to Equities Market Crashes. The Evidence indicates that Beta-Followers perform better than mere Alpha-Seekers.
Even so, we often seek Alpha (Appreciation of Individual Securities) as well in addition to Beta with specific Selections which we expect to Rise or Fall more than the Rise or Fall of the Beta of particular Sector.
As well, we are not at all hesitant about seeking Profits via Short Positions including via Exchange Traded Fund including leveraged ETFs. Why not Profit when Markets Fall as well as when they rise? There are several Good Reasons to do so, especially since, in recent years, Bearish trends have provided more of these Opportunities.
Finally, we tend to favor (predominately but not exclusively) Investments in Real Assets (such as Gold, Silver, Energy, and Agricultural products in relatively inelastic Demand) as opposed to Financial Assets (See our “Opportunities to Profitably Escape Paper “Wealth” into 2011” (10/07/10) in the ‘Articles by Deepcaster’ Cache).
The World of Financial Assets is increasingly fraught with Danger for Investors, as the Market Crash of the Fall, 2008, and the ongoing Mortgage Crises demonstrate.
Moreover, Major Central Banks Massive Printing of Fiat Currency increasingly heightens the Risk of Hyperinflation as well as Economic Stagnation. As many of our Articles (and increasing numbers of Investment Analysts) demonstrate, the Private For-Profit Fed is the lead Culprit of a Cartel* of Central Bankers and Agents and Allies is regularly engaged in Manipulation of a Wide Variety of Markets, and especially in attempted suppression of Gold and Silver Prices, because heightened Investor Interest in these Precious Metals tends to delegitimize the Central Bankers Treasury Securities and Fiat Currencies.
*We encourage those who doubt the scope and power of Overt and Covert Interventions by a Fed-led Cartel of Key Central Bankers and Favored Financial Institutions to read Deepcaster’s December, 2009, Special Alert containing a summary overview of Intervention entitled “Forecasts and December, 2009 Special Alert: Profiting From The Cartel’s Dark Interventions - III” and Deepcaster’s July, 2010 Letter entitled "Profit from a Weakening Cartel; Buy Reco; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & T-Bonds" in the ‘Alerts Cache’ and ‘Latest Letter’ Cache at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org, including testimony before the CFTC, for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.” Attention to The Interventionals facilitated Deepcaster’s recommending five short positions prior to the Fall, 2008 Market Crash all of which were subsequently liquidated profitably.
These Interventions Require that, to the extent possible, Investors and Speculators track The Interventionals, as well as the Fundamentals and Technicals.
Thus three Dynamic Portfolios – Fortress Assets, Speculative, and High-Yield, offer three related Strategies Essential to achieving the Goals of Profit and Protection.
I. A ‘FORTRESS ASSETS’ PORTFOLIO
The increasing Vulnerability of Wealth and the recent past and prospective failure of several traditional means of protecting it, coupled with the aforementioned risks, require development of Fortress Assets Portfolio.
This portfolio is based on several principles:
1) Acquire assets which are fundamentally strong at a technically propitious time, BUT, subject to ongoing consideration of the "Trump Card" of Cartel Market Intervention.
2) Focus on Acquiring Real Assets (primarily Gold, Silver, Energy and Agricultural Products or businesses focused on these) At The Right Time
Those Paper Assets which represent less Real Value than they nominally reflect in their Market Price, are increasingly risky. We have already described how those Paper Assets in many wallets, U.S. dollars, have been deteriorating mightily in Purchasing Power since 2002 – about 35%. Indeed the Vulnerability of Paper Assets was amply demonstrated in the Fall, 2008 Market Crash.
Thus, when investing in a paper/electronic security, it is important to carefully analyze what Real Asset, if any, the security actually represents and the contingencies to which that security is vulnerable.
But it is critical to time one’s investment in Real Assets correctly. This means the timing must not only take account of Fundamental and Technical analysis, but also of interventional analysis. Investing in Real Assets in the headwind of an ongoing or pending Cartel Intervention is often futile, or worse.
Bottom line: to maximize the chances of protecting wealth and Profiting, a substantial portion of one’s portfolio must be in Real Assets, or Paper Assets that genuinely represent Real Assets. Consider that hundreds of billions of dollars of Ostensible Assets could, and did, simply vanish in the tech-wreck of the year 2000 and again the Fall, 2008 Crash. One reasonable inference from this loss is that the Real Value in those Paper/Digital Securities was not there to begin with; otherwise it would not have vanished so quickly. The Real Assets behind all that paper (to the extent there were any Real Assets behind that Paper) simply were not valuable enough to justify the sky-high prices, so in the spring of 2000 the NASDAQ began a fall, which would end only when 60% of the ostensible pre-crash value would disappear. A Similar Scenario occurred in the Fall, 2008 Market Crash with devastating Results. Thus one goal of the Fortress Assets Portfolio is to prevent such a Wipeout from devastating our subscribers.
Conclusion: One must invest in Assets which have inherent, or strong and durable contextual, value, at the time at which that value has just begun to be recognized by the market. And the Market Intervenors must not be in the way.
3) Perform a Basic “Reality Evaluation” On Current Paper Assets
For example, consider a typical equity on the NASDAQ which pays no dividend, or a negligible one, and sells for a typical price-earnings ratio of about twenty (20). What this means is that the company has to have 20 years of earnings at the current level to generate the value equivalent to one share of its stock. One must ask whether the placement of one’s wealth in such a stock could ever be justified by the (hoped for) ever-increasing appreciation of that stock, and that the changes of that happening are high enough to make that purchase a good one. Remember, we are considering a stock (typical on the NASDAQ) that has miniscule or no dividends, and which reflects a price earnings ratio higher than the entire equities market immediately prior to the 1929 crash.
And when one considers the (generally declining) Purchasing Power of the U.S. Dollar or other Fiat Currencies into which those Assets can be converted, one realizes the chances of achieving Real Profit or even Wealth Protection are miniscule.
Bottom line: the only way that such a stock purchase could be seen to be sensible is if one can legitimately project that there is a high probability that the price will continue to appreciate and, that this appreciation, taken together with any yield, will Achieve a Total Return well in excess of present and Prospective Inflation.
4) Prepare for Increasing Uncertainty and Volatility
In the summer of 2005 and again at the end of 2006, market volatility as reflected in the VIX (a volatility index) was at record lows. But the Fall, 2008 Crash sent it to record highs. And the Spring and Summer and early Fall Rallies, 2010 sent it down again. Low VIX levels are unlikely to continue given the lousy Fundamentals, including high unemployment, a propped-up Mortgage and Banking System, and increasing, and unpayable, Sovereign Debts.
5) The Fortress Assets Portfolio Must Continually Change
For the aforementioned reasons, Deepcaster Fortress Assets Portfolio must be a nimble, “Flying Fortress” with both offensive and defensive capability. Relatively timeless stores of value (with the exceptions noted below) are increasingly rare. Moreover, with only a few exceptions, many traditionally legitimate stores of value (e.g. U.S. Government Securities) are increasingly vulnerable.
Consider “Dr. Copper.” Among the commodities, the cognoscenti call copper “Dr. Copper” because its price is so sensitive to real or perceived economic health. Through the end of 2004 and continuing into 2005, Dr. Copper was in a substantial price up-trend due to many factors (i.e., the perceived improvement of the U.S. and global economies especially including the increasing demand of China and India, for this important industrial metal). Thus, through the summer of 2005 one would see copper in many sensibly constructed portfolios. But the Fall, 2008 Crash caused it to plunge. And it has rallied again since March, 2009.
Bottom line: the Fortress Assets Portfolio is designed to be dynamic, flexible, and aggressive - - both offensive and defensive. The appropriate metaphor for a Fortress Assets Portfolio therefore is not that of a Defensive Fortress on the ground with great earthen works. Instead, the more appropriate historical metaphor would be the B29, the “Flying Fortress” of World War II. The B29 was flexible and aggressive, with both offensive and defensive capabilities. It could be directed against a number of military targets to enhance the United States’ military position, but it was also well defended with many machine gun turrets.
The foregoing principles provide the macro-perspective in which Deepcaster makes its selections. Deepcaster also makes use of the traditional and non-traditional techniques outlined here.
Afterword: The Fundamental Overhanging Threat: Addressing the Increasing Systemic Risks and the Fundamental Flaws of Most Portfolios
An essential consideration in creating the Fortress Assets Portfolio is the fundamental and increasing Systemic Risks that severely threaten many Asset Values. To briefly recapitulate, a major component of those risks are the massive, unprecedented levels of Sovereign and consumer debt, relatively low level of personal savings and business capital investment, the consequent trend of the declining value of the dollar, and persistent unemployment, among many others.
Record high, and still increasing budget, current account, and trade deficits in several Major Nations, and some $600 Trillion Notional Value of dollars of “private” OTC (i.e. not exchange traded) Derivatives threaten our entire financial and economic system. The integrity of these derivatives depends inter alia on the strength of their counterparties. And the derivative based failures of Orange County, California, Long Term Capital Management, Bear Stearns, Lehman Brothers and AIG just in the last two decades shows how fragile counterparty strength can be. It is not too much of an oversimplification to say the USA and many Nations of the Eurozone are increasingly living on money borrowed from other countries plus Fiat Currency created out of thin Air, and thus are at risk from “private” OTC derivatives. Indeed, the risks to the international economy and financial system are still enormous.
So far as the U.S. is concerned, when one considers this phenomenon of very high debt and a declining dollar trend, coupled with mass immigration and increasing outsourcing driving down wage rates and sending good manufacturing jobs overseas, the U.S., at best, will, in the foreseeable future, experience a stagnating economy with increasing price inflation. Thus, we reiterate that it is highly probable that the U.S. is headed into a period of serious stagflation as are several Major Nations in the Eurozone, and even in the Emerging Markets Countries. Many portfolios are not constructed to cope with these prospects.
Systemic unraveling and/or spasmodic market setbacks (which are now increasingly likely) as a result of these factors are quite likely. Consider Argentina just a few years ago. Although in most respects not a Third World Country, it nonetheless defaulted on its obligations and devalued its currency. It can happen anywhere.
II. HIGH POTENTIAL SPECULATIVE PORTFOLIO
The goal of a Fortress Assets Portfolio is to select assets which have relatively low downside risk and significant capital appreciation and/or income potential.
The goal of a High Potential Speculator Portfolio (DHPS) is to achieve relatively higher, or very substantial, returns while recognizing that potentially higher returns entail higher risks.
Nonetheless, in selecting a Speculative Portfolio one must employ many of the same selection criteria and techniques. Thus selections for both portfolios are considered from fundamental, technical and interventional perspectives.
Equity Selection Criteria - - Traditional, Non-Traditional and More
Such a Portfolio should take account of the following traditional and non-traditional selection criteria.
1. Is the asset undervalued in relation to its inherent value, or prospective contextual value?
2. Are overall markets, geopolitical and governmental conditions favorable?
An asset can have excellent inherent fundamental or prospective contextual value, but the governmental or geopolitical conditions may not be right to realize that value. In other words, a rising market tide tends to float most equities and other Assets, as a falling market tide tends to depress them.
3. Is the Asset undervalued?
4. How does the interest rate and inflation environment affect the asset?
5. Has the market just begun to recognize the assets appreciation potential?
6. What are the prospects for interventions affecting the assets value?
7. Finally, Deepcaster makes use of fundamental, technical and interventional analysis techniques. These techniques are sometimes trumped by the other principles and criteria described in this section.
III. HIGH-YIELD PORTFOLIO
On Dividends And The Power Of Compounding
Several Years ago the renowned and very successful mutual fund manager, Jeremy Grantham stated that the outlook for the appreciation of small cap stocks for the foreseeable future was a negative 1.6% per year. And his outlook for large and medium cap stocks was not significantly better. Market Developments have proved Grantham correct.
If one had followed Grantham’s implicit advice, one would have been “out” of Equities-in-General since then. Can any rational person reasonably believe that one’s wealth is protected and enhanced by capital appreciation prospects of a negative 1.6% per year for equities? This is especially true today when the Realistic prospects for Equities are no better (and arguably are worse) and given that Real Inflation is 8.48% annualized. Therefore, if one must invest in equities, and the Fortress Assets Portfolio does include a select number, one should dramatically favor, in one’s evaluations, equities that pay a significant dividend (preferably 10% or more, per year). That way, one has the benefit of the power of compounding. [Obviously the high-dividend equities must have value according to other Deepcaster criteria, as well.]
Let us consider how powerful compounding can be. To determine the effect of compounding, bankers use a rule called “the rule of 72s.” This rule allows one to determine the length of time it takes for any amount increasing by a certain percent per year to double. For our 10% dividend yielding example, 72 divided by 10 is 7.2; which is to say a $50 stock that pays 10% per year will return an additional $50 in just 7.2 years, even if the stock price itself does not appreciate one thin dime.
Indeed, it is essential to address the challenge of Inflation by looking at the Real Numbers. Shadowstats.com calculates the Real Numbers for the U.S. the way they were calculated in the 1980’s and 1990’s, before systematic Data Distortion and Interventions began in earnest.
Consider for example, the Numbers in Early November, 2010:
Bogus Official Numbers vs. Real Numbers (per Shadowstats.com)
Annual U.S. Consumer Price Inflation reported October 15, 2010
1.14% 8.48% (annualized September, 2010 Rate)
U.S. Unemployment reported October 8, 2010
9.6% 22.5%
U.S. GDP Annual Growth/Decline reported October 29, 2010
3.11% -1.44%
U.S. M3 reported October 17, 2010 (Month of September, Y.O.Y.)
No Official Report -3.71%
Bottom line: be skeptical of buying equities that don’t pay a dividend which, coupled with their prospects for price Appreciation, exceeds Real Inflation. While there are many other considerations to take into account when buying equities (and while we do, for other reasons, recommend purchase of certain equities that do not have a dividend) whether or not a Security pays a significant dividend is an extremely important consideration in Portfolio Selection in these increasingly perilous times, since Equities-in-general have gone nowhere for the past decade (and have lost 30% or more when adjusted for inflation), and are in a Bear Market, and most highly rated Bonds and CD’s provide niggardly or negative returns after adjusting for Real Inflation.
Thus, making Significant Profit without Great Risk and in spite of Real U.S. Consumer Price Inflation (in November, 2010, for example, at 8.48% per Shadowstats.com) which robs Purchasing Power, is a Daunting Challenge.
But it is possible if one is willing to take reasonable risks.
One Potentially Profitable Solution to this Challenge is selecting High-Yield Securities which typically should also have substantial Price Appreciation Potential, such that their prospective Total Return Substantially exceeds Real Inflation.
Deepcaster has identified several High-Yielders in his HIGH YIELD PORTFOLIO launched in the Summer, 2010. The Recent Yields of our five Inaugural Selections were 15.6%, 26%, 18.5%, 8% and 10.6%, when added to the Portfolio.
Wealth Protection - - Beyond the Portfolio
On the other hand, Fortress Assets in the context of today’s world and the probable future, inherently have built-in risk insulation - - not absolute immunity from risk, but insulation from risk. Moreover, the benefit of these Deepcaster Fortress Assets is that individuals with fairly moderate amounts of wealth can directly obtain them. Someone wishing to protect his wealth should not rely on Fortress Assets alone. Certain legal/structural entities provide additional wealth protection and risk insulation. They include forming one’s own corporation or limited liability company, family limited partnerships, charitable remainder trusts, off shore trusts, and others. Fortress Assets should be used in conjunction with these other legal structural techniques and entities, as determined by you and your personal financial advisor or lawyer.
And Finally, One Must Consider Market Manipulation and Its Consequences
Richard Russell, Dean of Newsletter Writers, commented a few years ago that
"One of the great mysteries of the markets is shown below (this one fooled the great majority of pros). If business is as good as is claimed, how is it that interest rates have remained so low, and bonds have held up so well? Below we see the 30-year Treasury bond going back one year. The bond bottomed in May 2004, climbed into the September period, and has been going sideways ever since. As of today, the yield on the long Treasury bond is only 4.85%, and the long bond is higher than it was six months ago."
"Has foreign buying held up the bonds? Is it liquidity that is floating the bonds up? Is the Fed manipulating the bond market? Is the bond market simply looking ahead and saying “I don’t see any big pick-up in business and I don’t see any inflation ahead…” I’m thinking we can see quite a bit of manipulation ahead. After all with a group able to buy a thousand or five thousand S&P futures in the space of one minute, manipulation has never been easier.”
Deepcaster, along with Richard Russell, is seeing much evidence of market manipulation in many sectors. Thus we always try to account for actual and prospective manipulation in all our Portfolios selections but we would note that manipulation is not always tantamount to market control. Moreover, no manipulative scheme to artificially set the price for a desired, tangible asset can last forever. Selling of physical gold into the market is required to suppress the gold price. But Central Bankers have limited amounts of physical gold that they can cause to be sold into the market. Once a market can be successfully manipulated no longer, the ensuing correction is often swift, brutal, and violent.
Thus, a Fortress Assets Portfolio should be quite helpful in insulating and increasing your wealth against developments yet to come.
A High Potential Speculator Portfolio can generate high potential Portfolio appreciation and/or income.
And a High Yield Portfolio can help you increase your Wealth at a rate greater than Real Inflation.
Best Regards,
Deepcaster LLC
Deepcaster.com
Wealth Preservation - Wealth Enhancement
Financial and Geopolitical Intelligence
Gravitas, Pietas, Virtus
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