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Patience Is A Virtue

21 May 2010 3 Comments

Stocks

For those of you who have been lost in the euphoria of the so-called “recovery”, you may be seeing cracks in the recovery for the first time.  The European debt crisis (more like a global debt crisis) seems to be having negative effects on the markets, and you might be wondering what is going on.  After all, aren’t stocks supposed to keep going up and up?

As I’ve been saying for well over a year, I believe patience is the name of the game here.  Yes, there has been a massive rally in the market that I did not fully participate in, but I’m definitely ok with that.   I believe bargains will be available in the future.  These bargains will be able to set you up for long term success – not just a quick 60% rally.  We’re talking over-sized returns year after year for decades.  Continue to watch the markets, keep your powder dry, wait for the next “flash crash”, accumulate cash and be ready to deploy into well-established, recession resistent, high dividend paying companies for your long-term portfolio.

In the meantime, build up your cash positions, pay down your debts, and consider picking up some physical gold and silver on a regular basis (insurance, security, inflation-hedge).  Do this, and I think you’ll be sitting pretty in a few years.

Real Estate

If you’ve lost track of the housing picture, don’t worry, it still sucks.  Interestingly, I wrote a few weeks back about strategic defaults (America: Land of the Strategic Default [4/29/10]).  Since then, I’ve seen several pieces in the mainstream media on the subject.  60 Minutes did a segment on strategic mortgage defaults the other week.  The other day, the Orlando Sentinel had a piece on it.  Also, the AP recently reported record foreclosures and delinquencies showing that the situation is getting worse, not better.

The house across the street from me has been bank owned for a few months and I’ve been watching it closely.  The home has served as a nice little barometer of Central Florida real estate for me.  The home was listed a few months back at $235k (bank-owned).  Apparently, they got a buyer, but then it fell through (not sure why).  Now, the home is listed at $215k with no signs of activity.  Even just a year or two ago, it would have sold for around $300k and the $300k is still a far cry from bubble peak prices that these homes were commanding.  As the price drops, I ask myself at what point does it become a good investment for rental income?  After asking myself this, I’ll typically go read some economic data which always leads me to the answer of: it still has a ways to go.

So, if you’re looking to buy a home, BE PATIENT.  You have plenty of time.  Be picky.  Make very low offers.  The housing mess has years to play out.

Possible End Game Scenarios

So, where does this go?  Let’s look at some possible scenarios and before I get into them, please note that I could be completely wrong on all accounts.  These are just ideas for conversational purposes.

Scenario #1 – Inflation-Fueled Recovery

In this scenario, the government stimulus and printing of dollars is enough to cause a “recovery.”  The tangible results here would be a nominal rebound in asset prices such as stocks and homes.  The problem is that these assets would still lose money compared to gold – or put another way, homes would become cheaper when priced in gold, yet more expensive when priced in dollars.  Essentially, assets are rising but gold is rising faster (hence, inflation-fueled).  In this scenario, holders of gold will be rewarded and there still wouldn’t be much reason to sell your gold (or other precious metals).

Scenario #2 – Deflationary Collapse

The deflationary forces are real and very much a threat to the economy.  Foreclosurse, plummeting values, these are all deflationary.  In this situation, all assets would plunge in value including stocks and homes.  Those individuals who have cut expenses, gotten out of debt, and hoarded cash will be rewarded with insanely low prices on things.  You might be able to pick up a mansion for nothing!  Better yet, you’ll be able to deploy massive loads of cash into fantastic stocks on the cheap.

Scenario #3 – Stagflation

This is a combination of the above to scenarios where economic growth is terrible but we have inflation and higher prices.  Real estate would likely still suffer as would stocks, but your gold and inflation-hedged assets would outperform.  In such a scenario you might be able to trade your gold for a mansion at some point.

Scenario #4 – Real Recovery

I have to put this in place, although I think the prospects of a real recovery are near zero.  Let’s first define real recovery.  A real recovery would be an economic rebound or recovery fueled not by printing dollars and government bailouts, but by an increase in innovation, production and productivity.  How do you know if the recovery is real or not?  Just watch gold.  If the Dow is at 20k and gold is at 15k, well the recovery isn’t real.  If Dow is at 15k and Gold is at 800, well then the recovery is much more “real”.  Contrast this with scenario number 1, the inflation-fueled recovery.  In this situation, the holders of gold and cash will be punished as stocks and other assets like real estate would outperform the “safety” assets like gold.

As I said, I think we will have one of the first three options or some kind of sick, twisted combination of them.  I don’t see any way we get a real recovery as outlined in scenario #4.  With that said, I can be wrong, so make up your own mind.

For me, I plan to focus on generating income, reducing expenses, boosting savings, investing in gold/silver assets and high dividend stocks (once better buying opportunities present themselves).  In all of this, patience is key.

3 Comments »

  • 20smoney said:

    I think gold goes higher but over several years. We haven't seen the end of Government-printing and simulus which will push gold higher and higher.