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Establishing an Anti-Risk Portfolio“It will be worth your time to study this article, as the principles involved resulted in substantial gains during the last decade. Specifically, the average Family Business Office client achieved a 51% gain over the 5-year period ending 12-31-2010.”
Damage inflicted to investor portfolios in 2008 was NOT UNEXPECTED – it was highly predictable. To the minority of advisors and investors that took the time to examine historical evidence, it was clear that the mountain of leveraged credit, coupled with greed and reckless overconfidence, was going to be corrected.
Collapsing stock markets and real estate prices, and structural unemployment signalled the arrival of a transformation of the global financial system. Make no mistake about it—we are in a Depression. Is it possible to preserve and grow your wealth in the current environment? The answer is a resounding YES, but you are likely to be spectacularly unsuccessful if you remain invested in the stock market, believing in the ‘efficient market theory’–-and especially if you are ‘buying-and-holding’ (a Wall Street mantra that has thoroughly discredited itself). On the contrary, we believe that passively investing in stocks in today’s environment should be labeled as ‘pure speculation.’ One facet of conventional investing philosophy that has not been discredited is the need to decide how much market risk an individual investor can handle. This is an involved decision, based on numerous factors, and beyond the scope of this article. Generally, you should start with a portfolio that contains only short-term Treasury bills. Dollar risk is negligible, since the government can always print more money to redeem the bills, and the short-term nature of T-bills insulates them from changes due to increasing interest rates. But Treasury bills do not provide portfolio growth; for growth, the investor must consider equities. In a typical middle-of-the-road growth-oriented portfolio, 30 to 40% would be allocated to fixed investments, consisting of Treasury bills, bonds of all types, money market funds and cash. The remainder would be placed in equity investments–-such as stocks, commodites and real estate. The KEY here is that in selecting both fixed income and equity investments, utmost attention must be directed to major forces influencing markets.
HOW TO INVEST: Thus, for successful results, you’re going to have to identify, and invest with, the MAJOR TRENDS. The first of these trends is in the equity area, where the largest contribution to gains (or losses) is determined. Since 2000, that trend has been ‘real’ assets (assets you can touch and feel, like timber, oil, copper, grains and gold). Here are two very important factors to consider in reshaping your equity investment thinking. 1. Pay attention to secular (long range) markets. This 110 year historical chart from RYDEX shows clearly that the investing world changed in 2000. The great secular bull market in ‘financial’—or paper—assets (stocks and bonds) that started in 1982 turned into a secular bear market. At the same time, a secular bull market in ‘real’—or ‘hard’—assets was launched, and real estate, oil, metals, grains and precious metals started significantly outperforming the stock market. The S&P stock index managed a nominal gain of 30% (including dividends) over the 11 year period from 1/1/2000 to 12/31/2010, while commodities (measured by the CCI Index) gained 207%, crude oil 257% and gold 392%.
2. Consider the most likely future performance scenario for real assets vs financial assets. Since the average duration for secular cycles (illustrated on the RYDEX chart) is 17 years, we appear to have another 5 to 10 year period ahead of us in which stocks should be in a BEAR market, with real assets in a BULL market. Conclusion #1: financial assets (represented by the Dow) have been crashing against real assets (represented by gold) for the past 10 years.
The BIG question is where we go from here. We believe that—since current conditions are as bad or worse than they were in the 1970’s—the ratio will collapse to a number closer to parity (1:1). In 1904, the ratio fell to 2.14; in 1933 to 1.59 and in 1980 to 1.33. For the value of the Dow Industrials and one ounce of gold to equalize, either stocks will fall from their current level by a FACTOR of 8, or gold will rise by a factor of 8 (or more likely a combination of the two) before the stock market’s BEAR days are over. Gold and the Dow could meet at 5,000, or 3,000, or ? Conclusion #2: real assets, representing the MAJOR trend, will continue to substantially outperform financial assets for the foreseeable future. Gold has risen every year since 2000; however, to equal its 1980 high, adjusted for inflation-factors then in use, it will need to continue to rise until it reaches $5,000/oz You can read more about the above concepts at these free websites: And you should sign up for our free monthly newsletter! Fixed income. Two significant decisions have made a large mark on today’s fixed income world. The first was Richard Nixon’s termination of gold-backing for the dollar (for international exchange) in 1971. From that point on, the buck has been sliding: down over 80%, for example, against the Swiss franc. And it is still losing ground against the franc and other currencies backed by sound monetary policy. Commodity exporters (Norway, Canada, Australia) are also significantly outperforming the dollar. Conclusion #3: The dollar will continue to decline against selected foreign currencies. This is another MAJOR trend and a reason why you should hold some foreign currencies, diversifying the risk that the purchasing power of the dollar will continue falling. The second major decision was the Fed’s catapulting short-term interest rates into double-digits in the early 1980’s to stop US inflation. It worked, producing a 25 year period of declining rates and strong performance of bonds. That period is now over and the day of reckoning for bonds (once the sea of new fiat currency being generated by central banks around the globe works its way into the financial system) is at hand. Bond values have only one way to go when inflation hits – DOWN. Bonds are NOT a safe-haven and government bonds are in a speculative bubble that is going to break soon. Conclusion #4: Your best choices for the period ahead are real assets, currencies and selective shorting of the stock market. Now let’s put the pieces together to produce an allocated anti-risk portfolio.
How has our anti-risk portfolio performed? Anticipating current developments, Family Business Office started repositioning client assets in 2003, evolving into the current anti-risk allocations. During 2008, we experienced only single-digit losses. For the five year period ending December 30, 2010, the portfolio of our average client gained 51.1%. The gain in 2010 was 21.0%. Just as the carnage in 2008 was foreseeable and avoidable, further MAJOR market damage seems inevitable – in 2011-2012. We fear that this Depression could be more severe than the Great Depression and last another 5 years or more. With years still to run for these major trends, it will pay you to understand and apply these principles–-or hire a financial advisor who can do it for you. If you fail to recognize and react to the changes accompanying this transformation, you may not survive financially. Recently we began going one step further: taking proactive steps to segregate client assets away from evolving market and government-induced threats to investments custodied at bank and brokerage firms, and in various retirement plans. To learn more, review “ASSET SAFETY CHECKLIST,” posted on our website.
Family Business Office…P.O. Box 2750…Grapevine, TX 76099 Phone (817) 684-8600…Fax (817) 684-8111
_________________________________________________________________________ Our primary information sources include the following. Every one of these sources forecast the trouble that we are now in and alerted their readers to it. And each one of them is highly experienced, and independent. Richard Russell (www.dowtheoryletters.com) has been reporting on markets for 53 years. He is as close to neutral as one can find in the financial forecasting business, calling the markets as he sees them. Russell is confident that we are in a secular bear market for stocks that won’t be over until 2016. He believes that gold has just entered stage 2 (of 3) in its secular bull market. Jeremy Grantham (www.gmo.com), a high profile asset manager with an awesome research team who in early 2008 termed the economy a “slow-motion train wreck,” is calling for “7 lean years” and a “VL”-shaped ’recovery.’ Gerald Celente’s business is forecasting and his commentary has been carried on most major media channels (www.trendsresearch.com). In 2007, he forecast “The Panic of ’08” .. in 2008 he forecast the “Collapse of ’09.” He’s now predicting war. Harry Shultz (www.hsletter.com) and Jim Sinclair (www.jsmineset.com), each of whom has been in the investment business for 50, years are calling for a transformational change to our society and markets. Doug Casey (www.caseyresearch.com), an outspoken 30+ year market veteran has for several years been calling this “The Greatest Depression.” Bill Bonner (www.agoraresearch.com) agrees that we are currently IN a depression. Martin Armstrong (www.martinarmstrong.org), regarded by some as the smartest economist on the planet, has stated that nations of the world are losing control over their money supplies and that this “is the key that will wipe out the plans of all Western governments and is going to force a complete restructuring worldwide.” Clif High writes “The Shape of Things to Come” from www.halfpasthuman.com and deploys 300 software ‘spiders’ to scour the internet, looking for subtle language changes in articles and chat rooms. His software interprets these changes – which represent information individuals are picking up from the future without realizing it – and turns them into predictions in specific areas. HPH accurately predicted the 2008 financial collapse, 2010 “oil volcano” and a lot more, and says we’re heading into a planetary economic depression. Jim Tucker (no website, but reporting for 35 years) and Daniel Estulin (www.danielestulin.com) tap inside contacts to report meeting results of the secretive Bilderberger, Trilateral Commission, and Council on Foreign Relations groups. Despite their focused application of immense wealth and power, results from 2010 meetings indicate that meeting participants are dispirited about being “unable to exploit the economic crisis they helped generate by creating a world ‘treasury department’ under the UN.” The current economic situation appears to have gotten out of their control. |
