A year has passed since equity markets world wide began their fall.
What’s next? Which currencies and which markets make sense now…if any?
Getting answers to questions like this are why we have regular economic courses here and at our farm.
Here are delegates at an earlier International Business and Investing Made EZ course enjoying an economic discussion on our front porch.
These courses update global economics so investors and business people can prepare for the year ahead. Last autumn’s course predicted the current downturn and introduced portfolios we would track in 2008.
Last autumn we first reviewed with delegates the portfolios we had created and studied in 2007. They had all risen.
Swiss Samba +53.32%
Emerging Market +122.62%
Dollar Short +48.19%
Dollar Neutral +38.67%
What a year. There were some great lessons learned including how ups and downs are magnified by leverage. I pointed out how the Green Portfolio had seen a 100% plus drop in the middle of the year before recovering.
I warned investors not to expect this all the time and worried that they were gaining false expectations because we had enjoyed two years of enormous growth. I pointed out that periods of high growth are normally followed by periods of low growth.
We reviewed how leveraged investments rise and fall faster than investments without leverage. We looked at an Oct 26, 2007 warning (see Leveraged Investments Gone)…just before markets started to head south. Here is what that warning said:
“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.
My biggest risks are in my own business. So 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. These facts, plus my belief that numerous economic woes are rising and my recollection of Oct 1987 leave me wanting to reduce risk in my equity p”ortfolio. So now I have eliminated all my leverage.
I reminded investors that we had two panics, one in 2006 and one in 2007. These sudden runs on equities were masked by phenomenal prior upwards performance but should not be ignored. All the reversals did in 2006 and 2007 was slightly diminish, for a short time, really great performance. At best the crashes of 2006 ad 2007 made great performance look slightly less good…for only awhile.
Then each time the markets rebounded before any damage was done to the statistics and investors forgot and perhaps ignored our warnings.
This time because the correction has lasted, investors are not forgetting. ..too late.
This is why we offer a year long emailed multi currency portfolios course and seminar so investors can look ahead and act rather that react (after the fact when it is too late).
Last autumn;’s course reminded delegates of the August 17, 2007 wanring that 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 that warning at https://garyascott.com/2007/08/17/1818.html
On September 21, 2007, a message said: “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 that warning at https://garyascott.com/2007/09/21/1811.html
An October 14, 2007 message stated: “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://garyascott.com/2007/10/15/1840.html
October 15, 2007 we wrote: “Okay it’s time to turn the burner down. See “https://garyascott.com/2007/10/14/1839.html
A November 8, 2007 Black Friday interim message warned about all the points above and more at https://garyascott.com/2007/11/08/1870.html
We looked at the ideas behind our 2008 portfolios.
Then the delegates looked at the new portfolios we would develop to study in 2008.
Green Portfolio. Environmental investing is a beginning mega trend so we kept the Green Portfolio as it was but pushed the reset button as of November 1, 2007 with $100,000 invested and $200,000 borrowed in Japanese yen.
Emerging Market Portfolio. The same fundamentals applied as with the Green Portfolio. Good values were supported by growth and earnings so we kept this portfolio in our basket for a third year. We made a major change by eliminating the 15% Far Eastern Equities and increasing the Turkish equities from 10% of the portfolio to 25%. We also eliminated the Czech koruna loan and borrowed 50% Swiss francs and 50% Singapore dollars instead.
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 was not really a dollar short portfolio…rather a portfolio of non US dollar equities that gave a broad distribution around the world that should do well if the greenback weakens more.
Danish Health Portfolio. Health is such a big issue world wide that we want to see what an investment in this sector will do. Denmark has some great health oriented companies so we chose this portfolio.
Infrastructure Portfolio. Because Western infrastructure needs to be renewed we selected a portfolio of companies that could profit from this.
Blue Chip Portfolio. One prominent feature we saw in the portfolios we tracked in 2006 and 2007 were mid year panics away from lower quality markets and equities. Because of this and because emerging markets are highly leveraged, especially with Japanese yen loans we could see many scenarios that would cause a 2008 panic (which became real) including further fallout from the sub prime loan disaster, a slowing US economy and over $100 a barrel oil.
We wanted to study to see in a 2008 panic if investors fled into Blue Chips, and how these equities would perform. Now we know.
We reviewed the fact that returns in equity markets had been phenomenal in the past four years…due to high GDP Growth and falling interest rates.
Here is how the six portfolios we developed and have studied have performed since November 2007.
All are way down.
Green Portfolio -56.08%
Emerging Market Portfolio -73.79%
Dollar Short Portfolio -35.21%
Danish Health Portfolio -92.18%
Infrastructure Portfolio -112%
Blue Chip Portfolio -79.21%
The biggest lesson we have been learning in this study is that in corrections of this magnitude, there is no equity markets where investors can hide. The best performing (Dollar Short) of the six portfolios only lost less than the other portfolios because it was not leveraged.
The infrastructure portfolio lost everything and a bit more!
Losses like this occur n abstract of course because these portfolios are maintained for research the entire year…without defensive measure. These particular portfolios have a month to go. I doubt they will recover in this short period of time.
Now let’s look at real portfolios. My own personal portfolio is barely up this year. Yet not losing in 2008 is a pretty good return.
Being highly liquid, this portfolio is now in a position to pick up some great values in new investments. The liquidity just makes things look better for now.
You can subscribe to our 2008-2009 Multi Currency educational Service at https://garyascott.com/catalog/bldh
Better still join us for our next course where we will update economics 2009 and look at our multicurrency strategies for the year ahead!
P.S. We hope you will join us in the Blue Ridge as Thomas Fischer and I review the global economy and look at how we may adjust our 2009 portfolios.
Our delegates have a great time in the Blue Ridge. Here are delegates at last years course discussing economics with Thomas Fischer.
The autumn will explode in color in October. Here is a shot I took at this time last year on an evening walk. The first week in October is the best week for autumn colors here.
We have added miles of roads on the farm this year. Our son Jake and his friend just created a map, over eight mies of driving through glorious woods. The blue lines are the roads.
Come up. Join us October 3 to 5 for a weekend of sharing business and investing ideas, plus the beauty of the Blue Ridge woods.