Rising Assets in a Downturn

As someone who shuns economic orthodoxy, I’m sure I say a lot of confusing things. When I view the economy, I try to be as objective and independent-thinking as possible. I don’t label myself and then pull out a checklist of everything I’m supposed to be bullish or bearish on. I mentioned yesterday that I believe not many people are going to invest profitably in the turbulent years ahead; and this is partly because they are too rigid-minded.

Assets Rising in a Downturn

One of the points I was very consistent on before this huge rally in stocks and commodities is that assets can rise in downturns. It is simply false to believe that all asset classes go down just because the economy is weak, and this most definitely includes the classic indicators of economic strength: stocks and real estate.

From 1928 to 1932, home prices in America dropped about 25%. Prices then rallied into 1937 while unemployment was stubbornly high. Put another way, real estate rose for 5 years smack in the middle of the Great Depression. In 1932, do you think people were bullish or bearish on real estate? How many people thought a rally was even remotely possible? I suspect not many.

Deflation and Inflation

2008 was what I would consider a temporary deflationary period. Stocks, commodities, and real estate collapsed while interest rates plummeted. Unemployment rose and people hoarded money. Nothing out of the ordinary.

Fast forward nearly 3 years and what’s happening? Stocks and commodities have more than doubled. Inflation is up, but real estate is down and interest rates are still low. Let this sink in. What I’m trying to say is that there is a disconnect between inflation, real estate, and interest rates. If you understand the concept of negative real interest rates, you understand that the government is handing out free money. And if the government is handing out free money, why wouldn’t you hedge with 30-year fixed money at 4.5%? The current relationship between interest rates and inflation is extreme.

Banking Reserves

What’s troubling to me is that banks are still accumulating reserves, which reflects a lack of confidence in the economy. What’s even more troubling to me is that the Fed can’t figure out that lending money to banks, and paying them interest on their reserves no less, is an unintelligent strategy. The Fed has created an environment of rampant speculation, and this is going to support most asset prices. The real big moves in assets is ahead in part because bond money needs to find a new home.

Stay on your toes because these are interesting times we live in. Riots are starting to spread again in Europe, shocking many people I’m sure. We are not out of the woods by a long shot. Gold still appears fundamentally positioned to rocket higher.

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     As usual I believe that you’re right.  Most of the investments that I hate sometimes do very well.  Can’t imagine anything that I hate more than REITs right now unless it’s (fill in the name of your favorite politician or used car salesman.)

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