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A main road near iTulip offices the day after a once in 100 years October 2011 snowstorm
knocked down trees and cut power to homes for several weeks.
CE: After reading your Ka-Poom Theory update outline… oh, boy. Huge project. Okay, we eat this elephant one bite at a time. I want to start by getting the chronology down. Readers may be either new and they don’t know the history or they are old farts like me who can’t remember. Those of us who started to read your work in 1998 think first of your tech bubble tracking start-to-bust. You famously told us to get out of stocks in March 2000. Then in 2001 you went off to run a couple of VC-backed companies. You started to track the housing bubble in 2002 while you were still doing that. Where did you find the time?
EJ: I only updated iTulip two or three times a year to note turning points in the housing bubble as it developed, such as the start in 2002 and the peak between 2005 and 2006 depending on the market segment, and to lay out my model for the rate and duration of the decline, which I determined to be 10 to 15 years from 2005, depending on the form and extent of government interference in the market's mean reversion process. I still expect a price correction to reach inflation-adjusted year 2000 price levels before the housing correction is over.
CE: You restarted iTulip full time in March 2006. You laid it all out – the coming crash of the securitized mortgage market, the global financial crisis, the mega recession, but you also said “no” to deflation and go that right, too. You were probably the first to identify the threat posed by the bubble in mortgage-backed securities. Your December 2007 timing on the stock market was epic. You said to look out for a 40% decline in the S&P500 in 2008. We got 38%. Nice. And you noted in March 2009 that the crash was over and a bounce started.
EJ: Let me interrupt you there because subsequent to all of that I was wrong about the duration of that bounce off the March 2009 lows. Except for a minor correction in April 2010 the stock market has recovered much of the loss in nominal terms.
CE: Heavy on the “nominal.”
EJ: Right, as I note in this analysis, and you saw in the outline, the S&P500 is still 31% below its March 2000 peak in inflation-adjusted terms. Of the two chances readers got to dodge the “Buy and Hold” stocks bullet, either in March 2000 and December 2007, March 2000 was the better of the two.
CE: That’s when you “sold everything” and went into 10-year Treasury bonds and cash, back when the yield on the 10-year was 6%?
EJ: 6.5%.
CE: A year later you took a 15% portfolio slug in gold at $270?
EJ: Average buy-in price was $270. And never sold it.
CE: That’s all on the record and verified. CNBC and all that. Your friends at Twin Focus Capital Partners validated your bond plus gold portfolio performance up to 2010. Okay, then in the middle of 2010 you started to fret about the Treasury bond slug of your portfolio, and look for stuff to divest into from bonds. You and some itulipers invested in Eastham Capital in 2010 based on your “rising rents” theory. How’s that doing?
EJ: Better than a 10-Year Treasury bond; over 12% cash-on-cash so far. Unfortunately it’s not something that the all of our members could invest in. The group is always looking for ways to invest in the trends we identify through our research and analysis.
CE: Then you and members put money into a start-up called TruTouch Technologies in line with your theory that tech entrepreneurs are the last great hope for the U.S. economy. How’s that going?
EJ: Too soon to say, but promising so far.
CE: I’ve always wanted to ask, you made piles of money getting out of the tech bubble at the top and shorting it, buying gold in 2001 at $270 and never selling it, shorting stocks in 2007… what do your friends and family make of you? Are they pessimistic like you?
EJ: I prefer to think of myself as a skeptical realist. On the one hand, I’m optimistic enough to invest in start-up companies like TruTouch Technologies and others, but on the other I’ve learned to listen to the data and endeavor to understand the underlying processes that drive the markets and economy. I don’t put much stock in the theories of anyone who has anything to sell, and certainly not in the policy makers who are making it up as they go along. The data telling me that we are well along in a self-limiting process that started more than 30 years ago. It’s going to be quite a shock when it ends some day.
CE: Now you’re telling us that the two big crises that defined the 2000 to 2011 period and you made your timing and investment decisions around since you started iTulip in 1998, were no big deal?
EJ: The two crises that defined the 2000 to 2011 era, while traumatic, were side-shows to the main event, spin-offs of a larger systemic problem. The models that drove our decisions to get out of stocks and into Treasury bonds and gold when we did were trivial compared to this latest update to Ka-Poom Theory. Ka-Poom Theory Update Two represents the current state of progress of 15 years of work. We are much closer to the finale now than in 1999 when the first version of Ka-Poom Theory was published after working on it for two years.
CE: The time scale is huge!
EJ: It’s hard to get your head around processes that go on for decades particularly for an event driven media and readers who are conditioned to think in terms of what is happening this week, today, this hour, and this minute.
CE: And you’re going to give it all away here?
EJ: (read more and discuss here)
iTulip Select: The Investment Thesis for the Next Cycle™
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