Well, that was it for 2009. Whew!
Another great year for gold. But it wasn’t a bad year for stocks
either. The NASDAQ rose 45%. The Dow went up about 20%.
As we guessed back at the beginning of the year, stocks bounced. What
we didn’t guess was that they would bounce so much for so long. All
over the world, stocks went up…and continued to go up. A bounce is
inevitable, following a stock market drop. And it’s impossible to say
how big a bounce it will be…or how long it will go on.
But a kiss is still a kiss…and a bounce is still a bounce. No kiss
lasts forever. Neither does a bounce. Looking ahead, we have to
anticipate that it will come to an end…probably in 2010.
If you’ve profited from the 2009 run up in stocks…bravo! Now, sell
them… Yes, the bounce could continue. But it’s not worth the risk.
And how ’bout the gold market! Gold has risen every year of the decade.
It was the surest, safest place for you money – by far.
Does that mean gold will go up in 2009? Does that mean we will stick
with our ‘Trade of the Decade’ for another ten years? Not to brag, but
our trade was a big success. Even we were surprised by how well it did.
As long-suffering Markets and Money readers will recall, we announced our
‘Trade of the Decade’ in 2000: Sell Stocks; buy gold.
“It turned out to be a good plan,” observes colleague, Merryn
Sommerset, in a recent Financial Times story. “In 2000, you could buy
an ounce of gold for $280 (the average price over the year). Now, it
will cost you about $1,100. At the time, Bonner saw what most others
did not. He saw the US not as an economy carefully and cleverly managed
by then Federal Reserve chairman Alan Greenspan and his passion for low
interest rates, but as a massive credit bubble waiting to burst.
“He also saw the massive and growing national debt, the trade and
budget deficits, and fast growth in the money supply as factors that
would naturally debase the dollar over the long term. He also saw the
credit bubble as global rather than peculiar to America. So it made
sense to him to hold the only non-paper currency there is – gold.”
So what’s next? What’s the trade of the coming decade? Well, your
editor has decided not to double-down on the identical trade. Gold will
remain in our core holdings, but not in our Trade of the Decade for the
next 10 years. Why? Because we think the US economy is going the way of
Japan went into a slump in 1990. It has come out…and gone back
in…and come out again…and gone back in again. In terms of the
amount of wealth destroyed – at least, on paper – it was the worst
disaster in human history. The value of real estate went down 87% in
some cities. Stocks fell from a high of 39,000 on the Nikkei Dow down
to the 7,000 range in 2009…their lowest point in 27 years.
Why such a bad performance? As we keep saying, if you really want to
make a mess of things you need taxpayer support. The Japanese put more
taxpayer money into the effort to prevent the correction than any
nation theretofore ever had. The result: the correction was stalled,
delayed, and stretched out over more than two decades.
And now, US economists are looking at Japan…not with alarm, but with
admiration. They are beginning to believe that the Japanese model is
the way to go…because it prevented widespread unemployment and a
Here’s our best guess:
Now that the US economy is caught in the same sort of de-leveraging
process that gripped Japan, the same sort of “remedies” will inevitably
be employed…leading to the same results, more or less.
We’ll skip the details for this morning. You’ll hear plenty of them in
the days, weeks, and months ahead – promise!
Instead, this morning, we’ll turn to our Trade of the Decade for the
next 10 years. There are, of course, two sides to this trade…the long
side and the short side. We had no trouble finding things to put on the
short side. In a de-leveraging period almost everything goes down. We
could have stuck with US stocks, for example. They’ll probably continue
to come down…just as they did in Japan.
But who knows? US stocks just had their worst decade since the ’30s.
What are the odds that they’ll have another bad decade? We don’t know.
But what we look for in our Trade of the Decade, for the sell side, is
something that has just had its best decade ever…something that has
been going up for so long people think it will go up
forever…something that everyone wants.
What does that describe? Well, the thing that comes closest is US
Treasury debt. Yields have been going down (meaning, the price of debt
is going up) since 1983. And now, despite a supply that seems to be
going off the charts, demand for Treasury bonds, notes and bills has
never been stronger. What’s more…if our analysis of the US economy is
correct…the supply of Treasury debt is going to continue to rocket
upward for many years. Deficits of $1 trillion to $2 trillion per year
are going to become commonplace.
How long will it be before the market in Treasury debt crashes? How
long will it be before hyperinflation…or a debt default…sends
investors running for cover? We don’t know…but it seems a likely bet
that it will happen sometime in the next 10 years.
So, on our sell side…we’ll put US Treasury debt.
How about the buy side? Ah…that is something we’ve struggled with.
While there are many things that seem likely to go down, there aren’t
many that seem destined to go up. Let’s see, what has been beaten down,
dissed, battered, and abused for the last 20 years or more? What is it
that people don’t want? What is it that they expect to go
Of course…Japanese stocks!
So there is our Trade of the Decade:
Sell US Treasury debt/Buy Japanese stocks.
Maybe not. Treasury debt has been going up for the last 27 years.
Japanese stocks have been going down for the last 20 years.
Does this mean we’re giving up on gold? Not at all. We’re sticking with
gold. Aurus eternis, or something like that. The yellow metal is what
you buy when you think the financial authorities are making a mess of
things. We have little doubt about it. So we’ll continue to buy and
hold gold…until the financial system blows up.
But gold at $1,100 an ounce is fully priced. It is not cheap. It’s been
going up for the last 10 years! At this level, it is insurance against
a monetary catastrophe and a speculation on when and how the blow-up
will finally come. It is definitely worth having. And holding. And
using to protect your wealth.
But the trade of the decade is a way of making money…by
buying/selling two opposing assets that are at extraordinary
valuations. It is not a speculation on what MIGHT happen. It is merely
a bet on the phenomenon known as “regression to the mean.” Things that
are out-of-whack tend to go back into whack…
If we’re right, over the next 10 years, the most popular investment of
2009 – Treasury debt – will go out of fashion. The least popular
investment of 2009, on the other hand – Japanese stocks – will surprise
everyone by finally showing signs of life.
In any event, the trade is fairly low risk. What are the odds that US
Treasury debt will go up? What are the odds that Japanese stocks will
go down? Of course, we don’t know…things that are out-of-whack can
get farther out-of-whack. But we count on time to sort it out. And hope
we live long enough to be able to say, “we told you so.”
Best wishes for 2010!
for Markets and Money