Sunday, December 28, 2008

Deflationary shock

First a personal disclaimer: It is not that I was so smart to get out of the market, just that I was too stupid to get in. Couldn't figure out why the McMansions offered 'captivating value', why stocks were just going to keep going up, why oil would go to $200 ... so I opted out. Took a Chauncey Gardener approach and learned a lot by watching. My belief is that Chauncey will be wearing toothpicks under his eyelids in 2009.
'The mendacity of hope and the urgency of not', should be the investors' mantra in this new Year of our Lord but unfortunately the lure of easy money doesn't fade easily - it literally has to be beaten out of a fella. Folks need to appreciate that fortunes weren't lost in 1929, they were lost by buying all the way down. Stocks bottom when no one cares.
Much has been made of looking at history to predict today's woes. B.S. Bernakke, a student of history, seems determined to make his own mistakes. The best he can do, in this humble blogger's opinion is to concentrate the timeline by truncating the misery.
Since we are too timid to drop the banks in the acid bath of price discovery as Sweden did, our alternative is too accelerate the Japanese process by flooding the insolvent banks with liquidity, removing all incentives to being risk-adverse by threatening to monetize cows, and ultimately bridging the output gap by stimulating anything that moves.
Try as we might though, the creative destruction of Mr. Market will continue, albeit in a much more temporally compressed form then the historical slideshow of our eastern friends.
As I sit on a Scrooge McDuck pile of powder, certainly I would like to be an investing smartypants too. Armed with the knowledge that the moment to deploy funds is when every emotional neuron is screaming 'oh hell no!' here is what I am looking for - with the admonition that if I am wrong I lose only opportunity.
Simply put, I am waiting for gold to crash.
What I am looking for is a deflationary shock marked by gold dropping 30-40% from current levels. If gold crouches all else will be in a fetal position save the dollar and treasuries (and maybe just maybe the UK pound). I'm putting my mental chips down on Rosenberg's 1.5% prediction for the 10 year.
What to do then? Why that which I've waited for. Become a long-term investor.
First in the 'hards' and select bonds - then in the 'softs', then equities. then housing.
Someday I will short the long bond into dust. But today is not that day.

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