Financial recommendations - a brief look back at 2008

Eleven months ago, in February 2008, I led a conference at Rowe (MA) along with Becca Martenson and Alejandro Levins. At that time, the current financial crisis was not even on the radar screen for most journalists and investment houses.

We made these financial recommendations:

  • Reduce exposure to equities
  • 10-50% of “Nest Egg” in Gold
  • Watch the markets carefully! Know what to look for.
  • 3 months’ expenses “out of the bank” and in cash (and remaining money in SAFER banks)

This is a basic set of recommendations that reflected my views that severe financial turmoil was on the horizon due to the effects of a bursting credit bubble. Given where we were in Feb 2008 and how things turned out, I am happy to say that we can chalk up a ‘win’ for common sense and good analysis.

Here’s how the world stock market indexes fared in 2008:

First, as we scan the US and world stock market indexes, we see no bright spots. Even thought the S&P 500 wobbled up from 1330 to over 1400 after the seminar in 2008, on May 27th I reiterated my call that a 40% to 60% stock decline was the most likely outcome.

I believed this because I was collecting too much information about how deep the damage was in some very large real estate markets, and it seemed that the pain from that wealth destruction had not yet been reflected in any of the earnings estimates that Wall Street was still peddling.

Further, I was concerned about the extent to which our past economic growth had been a mirage constructed out of new debt rather than new production. Debt growth in 2006, 2007, and 2008 was running as much as 6 times faster than new economic growth.

When the debt growth merry-go-round stops, it tends to fling the riders off rather unceremoniously. This dynamic has been observed all across the globe and in the US numerous times. A small bit of history can really go a long way, and this was one of those times.

Next, as we look at my favorite safe-harbor investment, gold (the green arrow), we see that it was one of the very few bright spots in 2008 along with, surprisingly, the dollar.

Of great interest is the massive strength in the Yen (red arrow) which is now something that has me quite concerned. The reasons are that 18% is simply a ludicrous advance, considering the staggering amounts of Yen/$ involved and the fact that such a violent move could well lead to a dramatic dislocation in the world’s second largest economy. Such things are not to be dismissed lightly.

Here’s a troubling story confirming this possibility:

Japan Economy May Shrink 12.1 Percent, Barclays Says

Dec. 30 (Bloomberg) -- Japan's economy will probably shrink at an annual 12.1 percent pace this quarter, the sharpest drop since 1974, as exports collapse, Barclays Capital said.

Gross domestic product in the three months ending tomorrow will fall at almost three times the 4.1 percent rate previously predicted, said Kyohei Morita, chief Japan economist at Barclays in Tokyo, after reports last week showed industrial production and exports posted the biggest declines on record in November.

“Given the speed and the length of the contraction, this recession could be the most severe in the postwar era,” Morita said. “We expect negative growth will continue for a fifth straight quarter to the April-June period of 2009.”

For an export-dependent country, this is a very troubling development (to say the least), and I will be surprised, very surprised, if Japan does not renew their efforts to create a weak Yen to bolster their export manufacturers.

But there’s a larger story contained in all currency moves of 2008. The conclusion I draw is that the floating exchange-rate system, kicked off in earnest in 1971 (August 15th to be precise), is now proven to be a broken, unworkable system and that these violent currency moves are reflecting that fact more than anything else.

This is sure to be a big theme for 2009, and I will reiterate my call to be cautious in the stock markets and to insulate yourself from unwarranted and violent currency movements by owning gold.

 

This is a companion discussion topic for the original entry at https://peakprosperity.com/financial-recommendations-a-brief-look-back-at-2008-2/

What about those of us with money held prisoner in a 401K that only offers stock mutual funds for investment options? What can we do???

I would urge anyone considering investing in gold to read this months cover story in National Geographic. A fantastic overview of the gold trade and damage its obsession does. Consider the following facts,
Gold produces the most waste and pollution per unit mined as any mineral
Gold mining is estimated to release 1/3 of the global mercury pollution
Gold Rushes through out history have ravaged watersheds and led many to their untimely deaths and this continues today in the Congo Indonesia, Peru and many other areas
There are other non cash capital options to invest in as well as commodities. Myself it is a diesel tractor and some farm land, Photovoltaic panels a wind generators and solar water heating technology. were not going to make this a sustainable world by hording gold
Cheers
SolarJoe

Quite true.

What about those of us with money held prisoner in a 401K that only offers stock mutual funds for investment options? What can we do???

Is there any chance you can move them? I know it’s a pain, but it’s worth it if you happen to be locked into a plain-vanilla universe of long-only funds.

What I did with my 401K holdings is I consolidated and moved them all a Rydexfunds IRA account.

There I enjoy a pretty full range of investing options as you could at many other places. I am neither steering you towards nor away from Rydexfunds…that’s just who I happen to use.

For instance, I was in 2 short funds (1 s&p and one Nasdaq) for a bit over a year and quarter and only closed those out to fully to cash on Friday December 5th, 2008.

I am pretty sure my next move will be to go short bonds, probably using their RYJUX fund (an inverse long fund)

They even have a precious metals fund, RYPMX.

I raise all of these details only to illustrate that for people who are not locked into a limited company 401k plan, there are places where you can move your retirement holdings that allow you to take advantage of whichever way you think the market is flowing.

If you are not comfortable with trading and managing your money this way, there are financial advisors who can assist. I have found an excellent advisor who manages funds in this way for a couple of my family members. I handle all my own investing, but would heartily recommend finding a knowledgeable, flexible, and independently-minded advisor.

 

Is 50% in gold a good mix now? Why not 100%?

As you may know, 401k’s from former employers can be rolled into your IRA account elsewhere with full investing options. If it’s a current employer’s 401k, some have lesser known options to move the funds to a standard brokerage investing platform that let you invest in stocks, inverse ETF’s etc. – eg Many Schwab 401k plans let you move funds to "PCRA" accounts - Schwab’s "Personal Choice Retirement Account". Fidelity 401k’s can move to "Brokeragelink" for the same open brokerage options. Whether a particular 401k plan supports these or not depends on what the employer set up originally.
If your employer didn’t set up these options, then you can ask them to add it - it’s not necessarily a big deal. If enough employees are interested, they’ll need to do it. It’s a big deal, tho, and it’s not right to be stuck with your crucial retirement savings in limited, inappropriate options these days - from my point of view, it represents a liability to the employer if they receive requests from employees provide appropriate options but don’t act on it.

Here is the link to the National Geographic article, Its a great read and sorce of information not easily available in typical gold forums.
http://ngm.nationalgeographic.com/2009/01/gold/larmer-text
solarJoe Vashon, WA.

That’s the boat I am stuck in with my current 401K - run by Merill Lynch, now BofA. They have a self-direct option, but it’s $125/year, with $30 stock trades. Though I suppose with inflation the way it is, $125 isn’t so much anyways!

Solar Joe I am all for investing in whatever makes sense as this period of time will be about capital preservation, in whatever form that happens to be.

I do want to put those statistics you cite in some proper scale though.

Total production worldwide last year for various minerals was (in kilotonnes, rounding):

  • 2 for gold
  • 46 for uranium
  • 1,300 for Nickel
  • 3,500 for lead
  • 10,800 for zinc
  • 15,100 for copper

So the "per unit mined" statistics sounds alarming but unless gold is six thousand times more wasteful to mine than copper, then copper extraction produces more waste than gold mining each year. My guess would be a LOT more.

In the US, the largest current source of mercury pollution, by far, is coal fired power plants, followed closely by municipal & medical waste incineration. Gold mining is not even on any mercury pollution source charts I can find for the US. I’m not sure about the rest of the world.

All of the "non commodity" capital options you list are themselves made from commodities each of which is responsible for its own list of environmental grievances. If you really want to see some massively disturbing watershed destruction and aromatic hydrocarbon pollution, please check into the Canadian tar sands operations. You’ll be shocked. Everybody who uses petroleum is a party to that fiasco.

Now, one could argue that we don’t "need" gold, while we do need all these other listed commodities, and that’s certainly a fair argument, but I would propose that we keep everything on the table and in context when deciding which extractive processes cross some threshold or other.

So I’ll agree with you that we’re not going to make this world sustainable by hoarding gold, but I’ll go a bit further and say I don’t think we’ll get there by hoarding tractors either.

Best,
Chris

 

I’ve been out of the US and equities markets for 4 years. I have approximately 30% in gold, 40% in yen bank accounts (I live in Japan) and 30% in real estate (free and clear in Japan and Fiji). Relative to the US dollar, 2008 was good, but the yen has risen considerably against gold, so for me events have been a mixed bag, though I’ve certainly been spared much of the suffering that many friends and family members in the US who have their life savings in securities (what an ironic name) have experienced.

The gold will stay where it is for some time. A lot of the cash will be invested in solar panels, new solar water heater, and farm tools/equipment in 2009. (I agree with you on that SolarJoe, but I get National Geographic and read the article on gold and would just point out that there is not much one can buy in this world that does not have an environmental impact. In fact, just participating in the US dollar economy, you are supporting the evironmental, economic, and military impacts which that country has on the world. Not saying you can do a lot about that if you live there, only pointing out that there are consequences no matter what one chooses to do. Gold is a store of value which can be used after a crash to invest in the things you advocate.) The real estate is is not speculative, but rather home and food security - two countries give me some attractive alternatives and flexibility in our uncertain world.

Chris - thanks for the comments on Japan. It is serious over here. Already, temporary workers have been layed off in the auto and steel industries and steel plants have actually shut down - something not to be done lightly as they are very hard to restart. Many of the temp workers are Brazilian Nisei who now, being foreigners, face extra hurdles in housing, feeding, and educating their families. I hope that the downturn willl push Japan toward a more sustainable economy with less dependence on export trade, but making such shifts will be very difficult. If Japan forgave some US debt (which is unlikely to be repaid anyway) it would help the US and help buffer the effects of the depression (I’ve never liked the world "recession") on Japan. Akio Mikuni, president of credit ratings agency
Mikuni & Co., recently proposed just that in an article on Bloomberg: Japan Should Scrap U.S. Debt; Dollar May Plummet, Mikuni Says and in an interview with Asahi newspapers - Akio Mikuni: Japan should provide financial help to U.S. He compares his proposal to the post WWII Marshall Plan that the US used to grow European economies and believes that without such major efforts, the dollar will plunge to 50 to 60 yen per dollar.

As an individual, I can only plan for likely contingencies. I am focused on working on the survival of my community regardless of what path major events may follow. I don’t forsee a recovery any time soon.

To help develope a healthy, positive, mental state for meeting the considerable challenges ahead, I recommend the following book, which was written in 1997: When Things Fall Apart by American Buddhist Nun, Pema Chödrön . It specificially offers wisdom about how to face the difficult things in life, whether chaos, painful personal situations, or even death, and live with compassion and joy.

Happy New Year. No matter what. :slight_smile:

 

 

I’m glad environmental concerns are coming up as a topic of interest.

On the subject of gold, I personally preffer Canadian Maple Coin on the assumption that canadian mining practices are less damaging ecologically and have higher labour standards than say South African gold such as from the Kruggerand.

If we are concerned about food and water safety I think we should all start considering the impacts that our diets have on the ecosystem.

I’ve been planning to open a forum topic and will do so in a few days once the paper my girlfriend is finished writing and has published it. Here are a few quick facts from that paper (I will provide references to the figures when I do post it in full).

Just some food for thought to generate some thought about your food. More to come.

And just for fun take a look at the following video. The Meatrix ( I’m guessing that DamnTheMatrix migth like this. DamnTheMeatrix Tongue out )

Chris, We have about $6500 in savings. Do we choose silver or gold? and what is your thought process for choosing one over the other at a given time? Any specific things you look at first, then second, etc. Thanks

Hello chris and all,
I understand well the relative impacts of mining gold compared to other human activities.I wish we could all agree to buy and hold agates like my kids do and use them as currency, they have much less impact. The question is should we be advocating and promoting gold as the promised new currency for wealth preservation? At its current price of close to 1000/once or more (that is consumer prices by the time you actually get a coin or bar home). It still seems speculative when we look into a future of less energy available and productivity. It could be that all our paper and metal stores of wealth will have to be de-valued.
My philosiphy is that we will need to take our accumulated wealth and invest it in the means for future productivity. For example. My family and I have turned our large suburban lot into an organic style vegetable farm and Have to continually invest time money and planning. Local agriculture seemed the solution for my family since we have always been avid gardeners and there is a huge demand for local produce where we live .I have other friends that are investing in other tools of production, like welders, plasma cutters and are manufacturing tools for sustainable living like strong working hand tools, and what we just tested today, a very impressive motorized chicken plucker. Its a bigger job to start investing in the future that we hope to see but how long can we sit back and watch our coupons of stored capitol generate more and more coupons for future redemption.
I agree that gold may hold some value where currencies will likely fail it has a Huge global following especially in the middle east and Asia(rising powers). so the point I would like to make is gold may be a good plan to hold while you sit on your hands and study what you would like to do but I hope that many of you will invest in solving future problems for humanity and the world. We need to feed more people with less oil, Manufacture more efficiently with less shipping, growing more food in our local areas, This spring I am investing in a type of prolific chestnut trees, and the drip irrigation to sustain them.
If people can see clearly things that need to be done for the future this is a good time to put your stored capitol into the tools property and communities to work toward that outcome. It seems to me that we can get more for our stored capitol now then likely in the lower energy future.
If you are considering gold, buy sparingly and be aware it has true costs. I hope you will read the article linked below as it offers fasinating perspective on the golden obsession.
Many cheers
SolarJoe

Ruhh: One point I might make is that the Maple Leaf is likely made from raw gold taken from a globalized market so it would be difficult to say that it came from a country where labor standards are higher. Your heart is in the right place though, I suppose. Your facts on water consumption were quite interesting and I believe the next 20ish years will see people considering the availability of freshwater as a key benefit to choosing to live in a region.

SolarJoe: I like your plan immensely. You clearly understand the nature of capitalism: production, and the means thereof. Your plan is right on the money in the long term and you will have some people of mind in worrying a lot less about money since your capital (and skills) should keep you afloat.

But I think most people, like myself, find it challenging to make an immediate change at this time. As I continually implement incremental changes in my lifestyle, I wish to have a haven in the meantime, and that is why gold appeals to me. In my present situation, I am not capable of investing my savings in productive capital and that is why I seek to preserve my savings for the time being. My ultimate goal, of course, is to get myself much more detached from the system, but that is not a change that will come overnight.

 

Mike

Ruhh

Can you please provide the basis of your water use figures for a vegetarian diet vs. a meat-eating diet? I think it would be fair to assume that home grown veges may well use less water, but what about commercially grown irrigated crops? Also, range (grass) fed meat will by definition use much less than grain fed. Even then, you’d need to take into account whether the grain that is fed to the animals is from irrigated or dryland crops.

I really don’t think it’s as simple a comparison as it first appears.

Cheers

Chewman

I think the tenor of the whole conversation about "where to put your money" is really on the right track. We’re saying much the same thing: "as much as you feel safe doing, take your ephemeral bank account dollars, and turn them into something which is something under your personal, physical control."
Some examples are: dollar bills, gold bars, tractors, a chicken plucker, a plasma torch, or solar panels for the house. They all have one thing in common: moving from someone else’s promise, to physical objects in your possession. Any incremental change is good, I think. Moving from a money market to GLD ETF beats staying in the money market - if you think the dollar will eventually do poorly. You don’t have to go buy gold bars today, especially if doing that is too scary for you right now. Step by step is the way to go.
I suggested to my mom she trade her prius for a natural gas powered car, and buy solar panels for her house. 5 years from now, we’re more likely to have stable natural gas supplies than imported oil, and I know I’m not going to get her out of her car. And she’ll be in that house for another 20 years at least. I feel confident that electricity costs will not increase at the projected 4% per year - I’m guessing it will be much, much higher, and perhaps at some point in the next 20 years, it will only be available intermittently, if at all. Then the trick will be, keeping those solar panels from being stolen! Perhaps an investment in large dogs will be in order at that point. Either way, my guess is those panels will be worth more to her than the $20k in her bank account right now.
For people in a restricted IRA, its tough. I had one of those. I stuffed all my money into a short term bond fund. During 2008, it was down 4%. No fun, but it beat the -40% the S&P took. In 2009 - its a gamble doing "buy and hold" investing. It feels to me too much like roulette. That’s why gold - you will retain purchasing power regardless of currency and stock market fluctuation. If not gold, then you have to play roulette: I would look for an energy stock fund, gold/silver mining stock fund, solar/clean energy stock fund, or foreign bond funds (euro?), or gamble on the USD and stay in a US bond fund. Just be clear what you’re betting on, and why. If it’s a lot of money, pick your favorite options, divide your money equally, and sell off 50% of any category after any rally > 25%. My choice is: 25% energy, gold miners, clean energy, and US bonds.
Those stock fund choices were very poorly performing last year: most of those categories are down 50-60% - more than the S&P. But that’s where my non-gold non-cash money is now.

Personally, I have positioned myself into a similar stance taken by SolarJoe, i.e. rent/mortgage free, a couple of acres in the country, access to a reasonably sized rural community with the skill sets and resources it has to offer (e.g. a farmers’ market until I get my own garden in), heat with wood only, plans to be totally off the grid within 1-2 years. This is all do-able (post-rent/mortgage free) with the cash flow generated by a very marginal small business.

On a more macro note and relative to the market charts, I can’t help but wonder about a point repeatedly made by Matt Simmons. In a nutshell, what will happen when it dawns on the international investment community that, relative to the sky rocketing cost factors inherrent in a Post-Peak Oil world, pretty well all publicly-listed companies are grossly over-valued, i.e. P/E’s are terribly out of whack? Will that not be an added hit onto the markets on top of the carnage that has already happened?

 

It’s worth remembering that the mutual fund options in 401k’s aren’t free either; they have expense ratios plus additional (usually small but unreported) transaction fees associated with them each year. Stocks may have a transaction fee (of $30 at Merrill apparently, plus the $125/year for the self-directed option), but once you have them, unlike mutual funds, they don’t charge you constantly to hold them. ETF’s (Exchange Traded Funds) that trade like stocks in self-directed accounts do have expense ratios like mutual funds, but usually their percentage is much less/year, depending on the ETF vs mutual fund being compared.

So, you’d have to calculate the size of your likely positions and cost per year of sticking with the mutual funds that you are being billed for anyway (and which you say poor choices) vs paying the $125/year and $30/trade in a self-directed account. Once you switch over and put 15% into GLD the gold ETF, (or whatever - and this isn’t a recommendation as to what to do) then you can leave it there for ages if you like, only paying the $125/year…

 

 

This is an excellent book I will second Pandabonium’s recommendation. The fact of the matter is, no matter how much planning and preparation we do, there will always be factors outside of our control. Preparing for the "unpreparable" psychologically and spiritually is essential.

Chris