Back from Vegas (thank God). No offense to those that love it, but Vegas is one of my ideas of hell.
Another form of hell is seeing first hand the pain and still frequent denial plaguing commodity investors right now. People are literally losing their shirts this year and many are still assuming it is just a short bounce until all will be Rosie again. The typical problem of over-heated markets is clear. Tons of people bought into the commodities bull theory just in the past couple of years as prices went parabolic. Now that parabolic spikes are inevitably racing back down toward their mean, many are shaking their heads in disbelief. “I don’t get it,” they say, “why are precious metals falling?” “Why aren't mining company shares doing well? Why am I losing money?”
Here I go with this simple comment once again: it’s called a bear market folks.
In bear markets like the one that we have been in since last October, pretty much all boats fall together; that means all risk assets like stocks, bonds and commodities.
Energy and commodity companies are late cycle performers; they make impressive gains late in the economic expansion. When the slowdown hits, they become the big laggards in keeping with their “deep cyclical” nick name. And important to realize, is that once these stocks turn down the sectors are not likely to outperform again as a group until the peak of the next economic expansion some 4 or 5 years from now!! You must time your exposure accordingly. Buy and hold is a sure fire recipe for disaster.
Another question I get is when I say that “cash is king in bear markets”, some people ask “what do you mean by cash?” This is the world we live in, things have got so convoluted in financial markets, that when you speak plainly, people get lost. First let me tell you that when I say cash, I do not mean credit. No matter what Scotiabank tells us, we are not richer than we think. A cash position means savings free and clear, not levered on debt. Anyone that has ever had to raise liquidity suddenly or go through an income disruption knows very well the difference between cash in the bank and no cash in the bank.
For North American investors, when I say cash, I mean if you are a Canadian you should hold the bulk of your savings in Canadian dollars on deposit in your accounts. For Americans I mean that you should hold US dollars on deposit in your accounts. Our home currency is the currency of our life. Whatever currency we pay most of our life expenses in is the currency that should be our “cash”. In our accounts at our Canadian firm, we hold Canadian cash, Tbills and Canadian bank money market as cash. Notice that by cash I do not mean “hybrid products” like asset backed paper. Notice the pain ABCP investors found this year, when they learned that their ABCP was not cash but high-risk imploding instruments.
Notice that by cash I also do not mean gold coins or bars. I know there are people who believe that paper money is losing value through inflation and is not to be trusted. But here is the thing. The financial world cannot function with gold coins as tender. It is simply not practical. Some people feel comfortable holding a core position of say 10% of their net worth in gold bullion. And if it makes you sleep better, that is ok. So long as we realize fully that holding gold coins is the equivalent of holding canned goods and bottled water in our cellar. You are doing it in case the world as we know it shuts down. You are doing it in the hopes that you will be able to trade gold for necessities in a war-like zone.
If you are holding gold bullion with some part of your net worth and hoping that gold is going parabolic again any time soon, then you are in effect hoping that the rest of your financial assets–the bulk of your net worth–are going to depreciate significantly. So, be careful what you wish for.
In our money management practice, if we get a buy on a foreign currency like the US dollar we will move a strategic percentage of the assets into that foreign currency. Buying a foreign currency with some of our assets is a strategic investment bet that the foreign currency is strengthening against our home currency. Just like any other investment instrument, if we are wrong in this bet, we will lose money. We can’t afford to be passive about our timing of this bet. If the foreign currency starts into a falling trend against us, we must have a sell rule just as with every other investment bet we take. We don't move more than 30% maximum to foreign currency assets ever. If we have a buy on a foreign currency but don't have a buy on any other asset class within the foreign currency, we will leave the allocation in cash, and Tbills denominated in the foreign currency. In this sense it is a pure currency play unless and until we also get other asset buys in that denomination.
Currencies are a distinct asset class in and of themselves. Too often people do not think clearly about this. When we buy a bond, commodity or equity investment, we are selling our cash to buy another instrument because we think that the other instrument will go up in value more than the home currency cash rate of return. We must make these investment decisions carefully and with the same objective rules that we need for all of our investment timing calls.
Cory’s Chart Corner
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