This message looks at the war’s impact on global economics, reviews how I’ve spread my global portfolio breakdown and then reveals a major auto maker’s bond that yields up to 16%. First, let’s see why a constructive stance can help us invest now.
Investors find perspective a difficult companion in troubled times. Yet a positive viewpoint is essential during recessions. For this reason, letís return for a moment to moneyís roots. When our economy crashes, what actually shrinks? And in good times what expands? When Wall Street tanks, what actually falls? Where do the trillions of dollars that disappear go and where did these greenbacks come from in the first place?
Economics, finance and markets are opinion. Never forget that money is nothing more than a figment of our imaginations. The numbers showing our bank balance represent nothing more than pieces of paper that are worthless unless someone is willing to do something for them. Other people must have a positive enough opinion about money to labor for it.
Labor is people processing materials, time or space. Products and services are a result of these labors.
A market is a group of people trading products and or services for a value.
Value is an opinion in the market of what products and services are worth. Value is a measure of return over a period of time. For example a super-heated economy with rapidly rising share prices is caused when the value of labor and products is based on the very short term. If a share is selling at 100 times earnings it may be considered good value if it is expected to rise to 150 times earnings soon. Investors in this scenario buy shares because they expect the value to rise very quickly. But remember this is an opinion not a natural fact.
Value is measured in more balanced terms when an economy is in equilibrium. Then good value will have to relate to the annual yield the share produces. At times like this a share that once sold for 100 times earnings might only sell for 10 times earnings.
Value in recessionary times drops below reasonable returns. This is why business and the economy slow. The market expects less for its labors, so it reduces the labor it produces.
An economy is the mass opinion of how much labor each person should create.
Money is a fictional lubricant created by society to make it easier for us to labor and trade our products and services. A recession is a time when a portion of a market feels that others will not value their products or services highly enough, so they reduce their labor.
President Roosevelt said it succinctly, ìthe only thing we have to fear is fear itself.” Fear is one of the opinions of society.
What is the cause of recessions? There can be several. One is a lack of natural resources to process into products (such as during the current oil shortage). Another reason for recessions is a belief that there is a sudden loss of money from an inflated market. Thus when the U.S. stock market ballooned, many people felt rich because their opinion of wealth was based on current market values which were in turn supported by numbers on balance sheets of companies. These opinions of wealth allowed investors to feel free to spend more money.
Businesses seeing this labored more to make more goods and they became more profitable, which increased the values of the shares in the market, etc. The public opinion of wealth ballooned up and up.
Then the stock market crashed. Numbers posted by accountants of companies turned out to be more fictitious than society allows. Share values fell and people that had felt rich now felt poor. They stopped spending for products and services. This caused businesses to stop hiring labor to generate more products and services. Unemployment rose and people felt even poorer. Stock market losses, corporate fraud and bankruptcy ruined many pensions. People felt even poorer and bought even less. The publicís opinion of wealth spiraled down and down.
This is why concerns over a crash at Ginnie Mae and Freddie Mac are so important. If these semi-government agencies crash, a huge amount of money will disappear. Opinions will grow more negative. There is more on this here.
Another cause of recessions is a major shift in the social view 9-11 is an example. This new event indicated that an entire change would come in the way life would be led. This altered the opinion of how safe and wealthy people felt. The public reduced travel due to fear (a very negative opinion) – Sharing Power lesson nine.
Airlines lost billions and laid off huge amounts of staff. The laid-off workers’ opinion of their wealth was reduced, they spent less, labor slowed and the downwards spiral was on.
Finally, the nature of the universe is one of ups and downs. A past message about James Gleickís book Chaos (https://www.garyascott.com/archives/2000/10/03/31/) shows how every aspect of existence including all markets are affected by this expansion contraction rhythm.
Since humans are a part of nature (a fact we sometimes forget) our moods are susceptible to these swings as well. And because ìWhat is above is also below” (see yesterdayís message if the mood of society is jittery, we are feeling this within as well.
Yet all of this is a figment of our imagination! The same number of people exist! The same resources remain. The same desires, transportation systems and all the abilities to produce and consume remain intact.
One new thought can sway the marketís entire mood. A sudden unexpected positive end to the invasion in Iraq is an example. The introduction of a new idea or technology that will raise the productivity of mankind (as did the railroad, car, TV, airplane, telephone, computer and Internet) could sweep our society. Just one event or invention can (and will) alter the entire mood.
History has proven again that the best investors are contrarian. True wealth goes to those who oppose the mood of the masses. Businesses that begin in recessions have heads starts when recovery comes.
So what can we do about this?
First, understand that the best the war can have on the global economy is a neutral impact. A quick end to the war will not create a global economic recovery. Yet an extended war will definitely act as a drag on the global economy. War kills consumers, eats up resources and reduces consumer confidence.
Right now, just keep your powder dry. Last Fridayís message showed how Warren Buffet’s recent stock strategy has been to do nothing. “Occasionally successful investing requires inactivity,” Buffet stated. Instead Buffet is buying junk bonds and his commitment in this sector has sextupled to $8.3 billion. (I recommend a bond portfolio below.) There are times when it is best to do nothing. So our best plan for having a portfolio now is to have great diversity.
On the subject of junk bonds, one just recommended is BB rated bonds issued by Fiat Motors that are yielding 16%.
You can get more details from Thomas Fischer at Jyske Bank. His email address FISCHER@jyskebank.dk
For me, my global multicurrency portfolio is now very diversified, mainly in bonds with only a few shares. My aim is maximum protection and liquidity so I can move rapidly into great business buys in the weak economy. But I will not rush. This is the time to be careful deliberate and focused. My Current portfolio breakdown is:
Approximate percent of portfolio Currency Investment
2% Danish kroner Jyske Bank shares
2% US$ Bank of Florida shares
12% US$ Savings Accts US dollars
2% US$ Nederlands Gemeenetn bonds
2% US$ Council of Europe Bonds
2% US$ Rabobank bonds
3% Nowegian kroner Norway Gvt Bonds
2% Australian $ LB Rhebland Phalz Bonds
2% Canadian $ Canadian Generic Street bonds
2% British Pounds British Telcom bonds
1% US$ US Treasury Coupon
3% Danish kroner Great Belt bonds
2% New Zealand $ Swedish Export Bank bonds
2% British pounds CD British Pounds
2% Euro CD Euro
6% Euro Dresdner Bank bonds
4% US$ Caterpillar Bonds
4% US$ Deutch Ausgleich bonds
4% US$ European Development bank bonds
4% US$ European Investment bank bonds
3% Mix 12 growth shares
28% Real Estate
2% Mix Current
For asset and bank protection purposes these investments are held at eight banks in seven countries, so as you can see when I suggest diversification, I practice this in every way.
On the subject of diversifying abroad here is an email I recently received from a worried reader.
ìLast week I got an ominous phone call from my accountant, at American Express Tax and Business Services. I was invited to come to his offices for a meeting: he had 3 other accountants there. They asked me to explain the reports that have been sent to me by my overseas Bank and sarcastically referred to these statements as “data dumps”. I felt was in no position to argue with these “experts” in “international accounting and tax” matters. They implied that I was very “cute”….why would any patriotic American place money outside the USA?”
Here was my reply.
ìDear Friend, It sounds as if your accountants are about twenty or thirty years behind the times. I used to get the old patriotic question in the 1970s but not since. You might tell your accountants that I and thousands of my readers have had dozens of overseas accounts with no problems at all. I have worked with dozens of top tax attorneys and CPAs over the past 20 years and most would feel neglect if they did not let their clients know of the asset protection, currency and market benefits of investing around the world. We live in a global economy and I would be very suspicious of accountants that lack this knowledge and how to read accounts from other countries in this day and age.”
Here is one thing we should all keep in mind. Many big accounting services, are staffed by very inexperienced employees who do not know much of the world. These firms may also want to earn additional revenues selling investments (almost always American) to their accounting customers. I find it quite amazing that most U.S. banks and brokers 30 years after the global economy ignited still cannot create a global portfolio for their customers. Could your banker or accountant help you set up diversification like I have above? If not, perhaps you should be looking for a better advisor and you will most easily find him in a banking center abroad.
This is why I have asked Thomas Fischer (a good international banker) and Leslie Share (a good international tax attorney) to help me conduct our international investing course this July 11-12-13, here at the farm – hope to see you here!
Until next message may your investing everywhere be good.