Value is our anchor in the tides of an ever changing world. Markets are continually in a state of flux…sometimes priced too high…sometimes too low. Hardly ever are they priced right… always distorted.
The trick to good long term investing is to use vale as a baseline that helps spot these distortions. Then look for trends that will correct the inequalities.
Our continual examination of value helps us spot distortions.
The 2008 market for example rapidly rearranged value. Shares and real estate in many places, were previously were too high. Now many are too low.
This means the long term trend will be up.
Do not doubt this.
But when will prices rise is the question.
Timing is a pesky question that… we can never answer correctly… especially when we have to take into account our need to sometimes liquidate investments… because we need the money.
For example we can almost guarantee that if we buy a broad spread of equities today and hold them for 20 years, we’ll make money and have several opportunities to liquidate for profit. Little good this does you if we need income over the next three years..for income…or cash to buy a car or something we need… or pay off a loan… or eat.
We look for trends to provide some of our timing answers. One of the most important trends we are trying to understand now is whether we will see inflation or deflation in 2009.
Our study of economic history in our last update shows that traditionally a rapid inflation portfolio should be weighted heavily in commodities first, equities second and real estate third.
Deflationary trends do better with portfolios weighted first in bonds, T-Bills
and then real estate.
So which way do we lean? The trend should be deflation..but governments everywhere resist this by trying to stimulate their economy with low interest rates and debt created spending.
The plunge in inflation, significant interest-rate cuts, falling commodity prices and
continued deterioration of the economic prospects have caused a marked fall in global interest rates.
Yet central banks are focusing on growth rather than inflation so they have little concern about what government spending and fiscal policy will do to the purchasing power of their respective currencies. Loss of a currency’s purchasing power is inflation.
Let’s assume that the trend will be led by the US government’s debt versus the amount of shrinkage in the US economy.
The annual gross domestic product of the US is estimated to be about 13.8 trillion dollars.
We saw information in yesterday’s update that suggests the US Federal deficit could reach $2 trillion next year or 15 percent of GDP.
We also saw in that update that the real US federal debt may be $59 trillion or more than four times America’s total annual production.
Ecuador just defaulted on some of its bonds when foreign obligations reached
21 percent of its $44 billion gross domestic product (GDP) compared to the U.S. national debt of about 400% of U.S. GDP.
This is federal debt only by the way. Add in state and local government debt and the numbers rise… a lot.
If you were in debt four or five times your annual income, could you repay that debt?
Here is why my bet is on inflation instead of deflation.
#1: If the US economy were to shrink 15% (not likely) that would be a downfall of about 2.1 trillion.
#2: If the US government deficit reaches 2 trillion, with state and local deficits, we could see 2.5 trillion borrowed. This is more inflationary than deflationary.
#3: My bet is that governments will do all they can to stop deflation.
But there is a way, right now, that we can hedge our bets.
Inflation generally is a time to invest in commodities, equities and real estate.
Deflation is generally a time to invest in bonds, cash and real estate.
So real estate is a given…good in both scenarios. You will see in my next personal portfolio that I have invested more than half of my portfolio in real estate and am looking for more.
Here is the hedge. Right now there are bonds that have the capital characteristics of equities…because their prices are so distorted downwards.
Discounted bonds provide opportunity for capital growth like shares…but also have the income aspect that make them attractive in deflation.
Ask your banker or financial adviser to review investment grade bonds that are highly discounted now.
You can learn more about such bonds from Jyske Bank or Jyske Global Asset Management (JGAM).
For more data about such bonds,
US investors contact Thomas Fischer at firstname.lastname@example.org
Non US investors contact Rene Mathys at email@example.com
Until next message, good global investing.
We invite you to join us in Cotacachi. Here is Cotacachi’s main shopping street.
Jan. 16-21 Ecuador Spanish Course
Jan. 22-23 Imbabura Real Estate Tour
Jan. 24-27 Coastal Real Estate Tour
Enjoy our chef ad we help at times) for great fresh Ecuador seafood!
Feb. 9-11 Beyond Logic
Feb. 13-15 International Business & Investing Made EZ
Feb. 16-17 Imbabura Real Estate Tour
Or join us on the coast.
See Ecuador’s incredible scenery.
March 8-9 Imbabura Real Estate Tour
March 10-15 Ecuador Export Expedition
March 16-19 Coastal Real Estate Tour
Here is our Ecuador tour schedule for the balance of 2009.
Date Course Couples Fee
May 21-26 Ecuador Spanish Course ($999)
May 27-28 Imbabura Real Estate Tour ($749)
June 12-15 Shamanic Mingo Tour ($999)
June 16-17 Imbabura Real Estate Tour ($749)
June 18-21 Coastal Real Estate Tour ($749)
July 2-7 Ecuador Import Export Expedition ($1,499)
July 8-9 Imbabura Real Estate Tour ($749)
July 10-13 Coastal Real Estate Tour ($749)
Sept. 17-22 Ecuador Spanish Course ($999)
Sept. 23-24 Imbabura Real Estate Tour ($749)
Sept. 25-28 Coastal Real Estate Tour ($749)
Oct. 21-26 Ecuador Import Export Expedition ($1,499)
Nov. 6-8 International Investing and Business Made EZ Ecuador ($999)
Nov. 9-10 Imbabura Real Estate Tour ($749)
Nov. 11-14 Coastal Real Estate Tour ($749)
Better still join us all year in Ecuador! See our entire schedule of 27 courses, tours, mingos and expeditions we’ll conduct in 2009 and how to attend as many of them as you like FREE.
The course fee includes meeting at Quito airport (day before the
course)…transportation (by group bus) to Cotacachi and back to Quito.
Course fee does not include air are. accommodations, food or individual transportation.