As I scour the internet, I sense misplaced bearish sentiment and a growing chorus of people expecting a stock market crash. I don’t think a crash is likely, which puts me in an uncomfortable position. Most of my peers in the “government debt is out of control, gold is going to rally, prepare now or forever hold your peace” crowd are bearish on everything. I just don’t agree, and I haven’t agreed in years. The sad thing is that this wholesale bearishness is about 90% right. It’s just the 10% where these bears are wrong destroys your entire portfolio.
Balance is critical in investing. A balanced approach in recent years would have left you in a very comfortable position. In the back of your mind you know about the debt crisis, but you would have taken the gift of yield and the value that it implied in stocks and real estate. This yield would have given you the patience to sit, shrug your shoulders, and profit during this curious period of no volatility in markets while the world is going haywire. And you would be able to accumulate a cash position for the future panic when dollars are becoming more valuable against other currencies AND on an opportunity cost basis.
Compare this to the “the dollar is going to 0 right here, right now and the market is going to crash 90%” crowd. Perhaps you shorted the market all the way up to new all-time highs. Or you went all-in on gold instead of hedging with yield. This means you might be in an emotionally-charged position right now. You need the market to decline. You need a rally in gold now. If gold drops another 20%, you must sell in panic. This is not a good position to be in and it stems from a lack of balance.
In theory, each investment decision should be based on opportunity costs and expected value culled from current information. In practice, our decisions are influenced by past decisions. And this is the danger most of us face when volatility reappears with a vengeance.
What’s At An Extreme?
You should be asking yourself: What’s at an extreme now? What looks out of place? If nothing looks extreme, you don’t force the action. Patience is one of the hardest traits to learn.
The extremes I see are on the government’s balance sheet and in government bonds. That’s about it. This doesn’t mean short government bonds, it means accumulate assets that will do well if bonds crash.
Stocks and real estate are in the range of fair value. The dollar is probably not crashing, and in fact, is likely to head higher. Gold is undervalued, but the timing isn’t right. You buy gold on true panic sell-offs and on the way up, not on normal corrections down when hardly any gold bugs have thrown in the towel. Long-term, yes, even buying at all-time highs near $2000 will be forgiven. But short-term if gold is the only investment you made, not very good.
The debt crisis will arrive in a blaze of glory. But make sure you are positioned to profit from it. Leverage will not be necessary when the tenor of the market shifts to panic. Dollars will be extremely valuable. This is your ammunition. This trend by no means has expressed itself fully yet. If you missed out on the recovery in stocks and real estate, investments based on short-term deflation (rising dollar) are probably your best bet.