US dollar drops and economic turmoil today could cause us to ask about investing tomorrow. Is this Black Friday?
US dollar weakness is high now but I do not know what tomorrow brings since I have to write and send this message from Ecuador on Thursday. However the fact that I have abandoned my already prepared message and taken the time to write this while immersed in conducting a course here shows the gravity of my concern.
Many investors recall 20 years back, “Black Monday”, the name given to Monday, October 19, 1987, when the Dow Jones Industrial Average (DJIA) dropped by 508 points or 22.6% in a day. Similar enormous drops occurred globally that month. By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%.
Fewer can actually recall “Black Thursday”, October 24, 1929, but we have read about it.
There are three common factors to those black days and today. They all took place #1 – mid autumn (Oct. Nov.) #2 – after a strong equity surge created in part by #3 – excessive government created liquidity.
This website has been warning about the conflux of such circumstances and the potential of an equity market and US dollar collapse for months.
Plus in 2006 and mid 2007 we had global equity plunges that warned us that something more sustained could be coming. If so, here goes.
August 17, 2007 this site warned that studies of 15 year cycles suggested a drop in the US market was near and said:
“Such historical measures are so inexact that we cannot predict just from them what will happen in the short term. The numbers are close enough that we could be entering the fourth sub cycle down (similar to 1976 to 1978). If so expect a sustained drop in markets for two to three years.” See https://www.garyascott.com/2007/08/17/1818.html
September 21, 2007 this site warned:
“There has been turmoil in equity markets for some time. There has been anxiety in the market run ups for the past two years. Each year (2006 and 2007) has been good. Yet both were marred by sudden drops of panic that ruined many investors. The first sudden equity black hole was March through August 2006. This was quickly filled in, and prices once again rose even more. Results have been phenomenal. Then equity markets dropped again violently last month. Now these markets have recovered again. Yet this may be a last gasp party. This drop of interest rates at a time when inflation is beginning to soar could lead to a rapidly falling US dollar. We can see from the chart here that the dollar has done almost nothing but drop for 40 years (that chart is below). Yet much more dollar dropping could be in store.” See https://www.garyascott.com/2007/09/21/1811.html
October 14, 2007 this site warned:
“We have increased risks through leverage at a time of strong market growth. We always like to put together top performing portfolios but our mission statement is to track portfolios and learn from them as they rise and fall. Periods of high performance are followed by times of low returns. We never know for sure when an upwards cycle will stall. Fundamentals look good for a bright 2008 in emerging and equity markets, but this can change quickly so to give our readers a better perspective, this year we are reducing leverage and adding a sixth portfolio with no leverage to study.” See https://www.garyascott.com/2007/10/15/1840.html
October 15, this site warned: “Okay it’s time to turn the burner down. We’ll always do our best and 2008 could be a very good year. Returns in equity markets have been phenomenal in the past four years…due to high GDP Growth and falling interest rates. Earnings growth has explained more than 100% of global equity returns in the past and unusual bull market. There has not been a general expansion of P/E multiples so far. Global P/E ratios are about the same now at 15 times earnings, about the same as 1987 before the rose all the way to 24 in 1999 which leaves the equity markets less vulnerable than normal. Equities are not expensive. Yet keep in mind that though equity markets are efficient in the long run they are not effective short term due to human behavior. Please remember the following rules of thumb about investing. We should expect 7% to 10% annual return in the stock market as a function of global nominal GDP growth and long term earnings growth plus risk premium over bonds. Getting higher growth comes from increased risk or luck. Periods of high performance are followed by times of low returns. We never know for sure when an upwards cycle will stall. Fundamentals look good for a bright 2008 in emerging and equity markets, but this can change quickly so to give our readers a better perspective, this year we are reducing leverage and adding a sixth portfolio with no leverage to study.
October 26, 2007 this site warned. “How much leverage do I use? Very little. I have had only about 10% of my portfolio leveraged. Compare this to 200% for the Green Portfolio (which is up 265% this year). Now I have none. A lot of my portfolio investments are basically in a multi currency portfolio of bonds…mostly in pounds, Swedish and Danish kroner. Previously interest rates on Swiss franc and Czech koruna loans were lower than what these bonds paid. Now interest rates have risen so it makes no sense for me to leverage the loans. The equities I hold are mainly in Europe and I do not leverage equities…especially after markets have risen so much. Periods of high returns are normally followed by periods of low returns.”
So yesterday I was not surprised to see the New York Times headlines read “Markets and Dollar Sink as Slowdown Fear Increases”
Here are excerpts from this article.
“Stock markets plummeted and the dollar sank to a record low against the euro yesterday as investors worldwide grew skittish over rising oil prices and the prospect of a substantial economic slowdown in the United States .
We are experiencing among our clients an awakening that the United States is in big trouble,” said Erik Nielsen, chief Europe economist at Goldman Sachs. The most immediate trigger for the sell-off in the dollar, traders said, was a jarring signal that suggested China might shift some of its enormous hoard of foreign currency reserves.
“The dollar fell to its lowest level against the Canadian dollar since 1950, the British pound since 1981, and the Swiss franc since 1995. The euro rose to a new record, $1.4729 before retreating.”
If you are surprised by this carnage…may I say, “I told you so.” In fact I have been telling readers so for nearly 40 years.
It may come as some surprise when everyone else finally agrees with me about this, I’ll say, “don’t panic- This may be a good time for the US dollar to show some strength”.
First, look at the graph below that we have shared on numerous occasions.
There are a number of circumstances now that are eerily similar to those of the early 1980s rather than late 1980s, a time when the greenback had a remarkable up tick.
Yesterday’s NY Times article (mentioned above) pointed out some strong US dollar fundamentals when it said:
“Amid the carnage, though, there were still several signs that the economy remains healthy. Productivity — a measure of how much the country produces for each worker — expanded more than expected in the summer, the Labor Department said, suggesting that the economy still has the ability to grow without stoking too much inflation.”
Jyske Bank in their November 7, 2007 Asset Allocation Strategy wrote:
“We raise US equities to neutral. The dollar has weakened markedly over the past months, and the prospects of a dollar strengthening will benefit European-based investors. For the long term, the US economy is still facing major imbalance problems, but we assess that this is discounted in the prices to a certain extent. US equities are also less volatile, and in the event of a major global downturn, they will outperform those of the other regions.”
My portfolio breakdown by currency is currently:
Portfolio Currency Breakdown
Real Estate 43.0%
Emerging markets 10.0%
Danish kroner 9.9%
British pound 6.0%
Swedish kroner 4.0%
Aust. $ 1.0%
Canadian $ 1.0%
Personal Asset Class breakdown
Emerging Equities 1.5%
Emerging Bonds 8.5%
My portfolio now has no leverage. I cleared this out as mentioned above a couple of weeks ago. My portfolio is now up 11.53% in the last 10 months (January 1, 2007 to Oct 1, 2007) and I am quite happy with this. This portfolio is in such a balanced position it is not likely to be hurt badly by an equity crash even if it is global.
In fact the currency collapse is playing quite nicely into this portfolio’s position and I will be looking for some extra profits to arise. I may take profits on equity and bond positions, mainly European equities and high yielding bonds as these instruments are moving into favor now. I’ll be looking for bargains that will arise from an emerging market and dollar debacle.
If you have not been moving out of the dollar, this current opportunity may have been missed. Be careful not to compound your position now by jumping too much out of the dollar and equities and losing a second time on a greenback and equity market rebound.
Markets are likely to shift into a position where bargains in dollars and dollar equities arise. This may be time to take profits in Euro and European equity positions not to invest in such positions.
Overall I will maintain a balanced multi currency position with reduced leverage at this time. A portfolio of this nature will suit many investors, but every person should build his position intelligently, tuned to their circumstances, with the assistance of their financial advisor.
Until next message, good global investing! If the sudden equity and US dollar drops has turned this into Black Friday, some great bargains will abound!
P.S. We can help you guide your investment advisor in these turbulent times. We sent our first 2008 multi currency update to our Multi Currency Course subscribers earlier this week and introduced two new portfolios aimed at profiting in this current scenario.
That update said: “In 2008 one new portfolio we’ll track is a Blue Chip Portfolio. One prominent feature we saw in the portfolios we tracked these last two years has been the panics. The world is not convinced yet that emerging markets are the places to go. Plus emerging markets are highly leveraged, especially with Japanese yen loans. One lesson we learned from the panics of the last two years is that equities recovered the best after each panic. There are many scenarios we can imagine that will cause a 2008 panic including further fallout from the sub prime loan disaster, a slowing US economy and over $100 a barrel oil. Last go round investors fled to US dollar bonds. As noted above the flow to US dollars last July could have been the last time in our lives, that we will see a rush for safety into the US dollar. If there is a 2008 panic we are thinking that investors will flee into Blue Chip, mainly non US dollar, equities…and this portfolio will do well.”
“Another portfolio we’ll track is a non leveraged Asia Dollar Short Portfolio. Since I have closed all my loans personally, Jyske accepted my suggestion to try one portfolio without leverage. This is the one we chose. We reduced leverage but dropped bonds and invested in a spread of global equities instead. This is not really a dollar short portfolio…rather a portfolio of non US dollar equities that gives a broad distribution around the world that should do well if the greenback weakens more.”
The goals of our Multi Currency Course subscription are threefold.
#1: Help each subscriber improve their creative skills for developing investment ideas that serve their specific needs.
#2: Help investors learn how to stick to their good ideas and get out of their bad ones.
#3: Help investors understand multi currency investing because as you will see below…we may need this ability more than ever now.
You can see these portfolios and track them with four others for the next year by subscribing to our multi currency course. See https://www.garyascott.com/catalog/bldh