Earthquakes and Tsunamis, life in the age of Bubbles.
Since the beginning of this century the instability of our bubble economy has created a series of disasters that were at least partly predictable as proven by Peter Schiff’s Crash Proof and others who had written and profited from these events. The easy money policy, which facilitated this new economy does not appear likely to change in the near future, therefore it would seem prudent to analyze our recent history to try to help manage the risk of the next event.
I view the bubbles as a growing amount of potential energy, like that which is built up in an earthquake fault. When an earthquake takes place, this energy is released causing the brief, initial destruction. If an earthquake is associated with a large body of water, then a secondary tsunami may result, which can cause further devastation.
The markets have seemed to follow a similar pattern. With persistently low interests rates and quantitative easing, the world governments have supplied a growing amount of potential energy into the market, raising equity and commodity prices, while destroying the incentive to save.
With each successive bubble we find ourselves reliving a children’s game, musical chairs. We have a sense that current political agendas and the easy money policy, which I noted above, distort the markets. What we don’t know is when the trigger for the next economic earthquake will happen and whether it will be short and uncomplicated or long and associated with a financial tsunami. So like the children’s game, we are constantly eyeing a chair to allow us to sit the downturn out. We know that there are not chairs for everyone, so someone will lose when the music stops, but whom?
Over the last two weeks, it feels like we have entered a new event. The trigger appears to be the crisis over sovereign debt in Europe. The initial financial earthquake was the recent abrupt sell off in the markets, while gold was supported by the euro flight to gold, even while the US dollar index hit a recent high.
This event by itself may have resulted in a limited financial earthquake followed by a short recovery time. What may be transforming this event into a complicated financial tsunami is the news regarding energy production and mining activity. Specifically, the Massey mining accident, BP rig accident and the recent refinery explosions. This mixed with politics during an election year will further add instability to the markets. Some have already begun diving for the chairs, most made of shrinking denim US dollars and a few made of gold.
As the water recedes from the shore, we know we have to act soon. A few have survived a tsunami and have sold their story to the media, but this is probably not a good business plan. The question again comes down to what is really safe and will hold its value, besides gold and silver? The US dollar may be safe in the short-term, but not many believe that it will hold its value, especially if money funds and bonds pay very little interest. I had written two prior blogs this year concerning this topic:
At World’s End
A new theme for 2010 or just another sequel?
This current blog is just an extension of the ideas that I had in the prior blogs. What is new for me is the idea that if market events (crashes) can be expected to occur at shorter cycle length but with greater destructive power, then I would aim to build a portfolio that does not require me to time the market well on the sell side but allows me to keep most of my holdings intact, even if a 2008 tsunami happens again. In addition to the areas that I still agree with in my prior blogs, I would like to add two focused areas:
Canadian energy and transportation (CNQ and CNI).
US computer technology for the next generation of servers and monitors (VMW, EMC and PANL)
I have also recently mentioned APPL and FCX as two other great investments, which I own as part of my long-term portfolio.
My financial recovery since 2008 has been based mostly on a series of bets on Canadian miners and smaller energy companies like PDS and CNQ. As I continue to look for companies that could survive and profit given anything short of Armageddon, I realized that I should look at my own business for clues. I am a physician who helps runs a single specialty cardiology group. My main focus recently has been budgeting and planning our next generation server and computer upgrades. Like many businesses over the last two years, we have cut all discretionary spending, including our IT infrastructure. The potential to replace our 12 existing servers with two or three servers using VMW and EMC products with a substantial cost savings landed these companies high on my investment list. If there are many businesses like our own who have put off necessary upgrades over the last two years, then they may also find relatively inexpensive replacement solutions from these two companies. So the companies that continue to survive the “recovery” may further the recovery of VMW and EMC. PANL is the company with the next generation of monitors and lighting, which I believe will track the other two IT companies.
Canada has a great landmass, low population, relatively sane governance and a wealth of natural resources. They have a proven track record of working with Asian governments in mutually beneficial investment agreements. Examples include the stories of TCK (China) and TGB (Japan). This is key since Canada is an ideal exporting commodities country, located safely between its importing trading partners, Asia, the US and Europe. To facilitate the movement of products outside of Canada, CNI provides a low cost and well-run rail system, which covers most of the country. CNQ and other energy companies in Canada may become more important to the US, especially if politics and environmental concerns dramatically decrease our US domestic energy production for more than a short period.
I think I see the water leaving the shore. I’ve found some high ground with stocks that saved me from the last tsunami and I have reinforced my Ark with a broad selection of new miners, which I pick up in February 2010, during the precious metal and miners sell off. I have also recently added EMC, VMW, PANL and CNI. And with what was left of my speculative play money (US dollars); I also bought DGW at $23.50 today, which is a long-term China water infrastructure play that reached my limit order today.
Now I am all in.
This BEAR has just called the top.