Juggling Dynamite

We live in very anxious times. People everywhere are talking about their fear.
The demise of the US economy has become gradually and then widely accepted as the U$ dollar plummeted for 7 years.
As the dollar fell and credit derivatives buoyed consumption, commodity prices shot to the moon.
But here is where human's fall down. We are backward looking creatures. When something has been happening for a while most of us can only see more of the same in the future. This is why most people (and governments) are poor planners and horrible investors.
To survive and thrive each phase of human history we must fight for objectivity and make fluid, realistic plans as we go.
For a long time, at my Canadian money management firm, based on our own set of technical rules, we had a sell on the US dollar. So we stayed out of the US dollar. At our firm we like to keep things simple and objective as possible. The U$ was dropping versus our home currency so we stayed out of it. While the U$ was dropping commodities rallied and we made money on commodities.
But we did not fall in love with commodities. We did not hate the US. We did not need to.
Last November we got a buy on the US dollar so we bought it. The trend has been going up ever since. This spring we got a sell on our gold and energy positions so we sold them. We did not question the signals we received on our rules. We did not argue against them, we did not try to insist on our way.
I have learned the hard way over the years, that I am small and inconsequential in world financial markets. My education is worthless, my reasoning superfluous. Financial markets don't give a damn what I think. They do what they do– with or without us. The only thing that we can control as investors is our rules about when and how we agree to take part in markets.
A few months ago, as commodity prices were peaking out, I noted that many long-only commodity investors had turned into the frenzied, rabid creatures in Will Smith's movie “I AM”. Their eyes had glossed over. They were foaming at the mouth. They had literally gone “postal” in their adoration for commodities and gold and their hatred for all things American. But I have seen this insanity before in the tech bubble of the 90's. I recognize the characteristics.
This weekend I was a guest on a short segment on the Korelin Economics Report. During the interview I noted that the US dollar had in fact been rising for several months against the basket of world currencies and that during the same time frame commodities had been correcting.
Notice this was not my opinion on anything. This was simply a statement of fact about what has actually happened the past few months. I also pointed out that in the anti-American sentiment prevalent in our times, many people seem to have missed that credit abuse and over-consumption have been a western-wide phenomenon the past few years. I said the US has been dumb for sure, but many other western countries have perhaps been even dumber. I know this not because I love or hate the US. I know this because it is part of my job to monitor and measure a multitude of macro-economic trends in countries around the world every day. My clients do not pay us for emotional arguments; they pay us to protect their assets with realistic analysis.
This week when I was speaking at the Vegas Hard Assets conference, I met many people that had lost heavily in gold and commodities over the past several months. They were still heavily invested and emotionally arguing their positions. They flash anger at anyone who cannot agree with their thesis.
The following email I received yesterday is an example of the emotional attacks I frequently receive when a listener is incensed by my observations. He had heard me this weekend on the Korelin Economic segment:
“Ms. Park…
I am using my wife's E-mail address. The comments are my own.
I had come to appreciate much of what you had to say on BNN, a show not always seeking the brightest lights in the universe. You often presented sage comment that is appreciated by contrarians, many of whom have been proved entirely correct.
However, your wave the flag for the U.S. dollar and U.S. economy turned my stomach. You exposed yourself as a continentalist and probably good old Yankee style consumer capitalist. You tried to soften your earlier comments on another segment of the show, but it was too late by then.
It never ceases to amaze me how very few unique thinkers there are and how few Canadians understand the depths of the American economic corruption. You just don’t seem to get it that the United States is yesterday's story as the great financial empire, just as Britain's tenure disappeared after WW1. America is done. Many of the people on that show, most of them American, knew that. But not you. In your perky way, you went on to deify the American economic thinkers, most of whom are corrupt and hypocritical.
The next time I hear your perky voice, I shall turn you off. You have shown us “now” who you are.”
These words speak for themselves. This man is long precious metals, has lost heavily of late, and is lashing out emotionally. He can only tolerate statements that correspond with his positions.
I take no pleasure in watching others make classic errors and lose capital. As I tell my kids, the truth is the truth no matter what I say. We cannot change reality by arguing our own position more and louder. I am sorry for those that have not had a sell rule on their positions. I am sorry for those who do not have a buy rule to know when and where they should invest next.
I do not profess to know where world markets or the US dollar are headed next, but we will watch trends carefully and make tactical decisions based on objective data. It is the objective rules we have developed and that we stick to, that have allowed our accounts to be up 6% year to date in 2008 while others have lost heavily.
If we get a sell on the U$ again we will sell it. If we get a buy on gold again, we will buy it. It is that simple. It is that humble.

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.

Ms. Park will be a guest speaker at the Hard Assets conference at Mandalay Bay Resort in Las Vegas Sept 9 and 10. You can learn more or register for the event here.