Sell Everything

[Jim Nickerson]

Re: Sell Everything

The option I have chosen is to move money offshore into ultra-conservative banks in other countries.

I figure the ATMs will work no matter what, and furthermore if there is a currency inflation of the US$ (accelerated beyond what has already happened), I can again experience the benefit as I did while in Japan in 1999 - 2002.

Japan, Switzerland, and a little in Russia (for admittedly scarier looking ruble exposure).

As for FDIC - I thought I saw a paper not too long ago where an analysis of FDIC showed any major banking crisis would run the program out of money in 6 months. This is just like the pension program, only if the overall economy and government are in trouble there will be nothing left to add in.

At least, not until inflation has spoiled most of the 'insurance'.

If it is not too invasive a quesiton, how have you done that? and if you can answer as much detail as possible would be appreciated.

[bart]

Re: Sell Everything

It would seem wise to me for there to be some reversal in the upward movement of the markets before anyone gets seriously short, though some of the posted asset allotment accounts have established short positions.

Very much so - there must be a significant trend line break before shorting in my opinion. It actually did break in the early morning of 2/27 and I did establish short positions at that time.

Another mild observation, of all the people who contribute (and frequently) here, I would say you write the least about how you may be positioned. Why don't you join the "game" and put up an asset allotment in that thread?

I note there are some others who speak alot about how they think one should be invested, but they have not put up asset allotments either, that is to say they have not put their monies where their mouths are.

I'm sure you're not the only one who wonders why I don't talk about my portfolio and trades much, and haven't joined that asset allotment thread.

There are three primary reasons, the first being that most of my trades are in the futures markets and that thread precludes futures. I never have been much of a stock guy and only own a few mutual funds.

The second is that I don't want to be viewed as encouraging or promoting futures trading - they can be very dangerous to one's financial health if one isn't well educated and doesn't have good money and risk management skills, etc.

The third and probably most important is that mostly I'm a short term investor/trader. Very recently, it's not unusual for me to open a trade in the morning and exit near the close - like I did last Wednesday on the S&P. I just don't have the confidence needed to carry leveraged or highly leveraged positions overnight.
My average trade length during the last year or so is under two weeks too... and I also don't want to encourage that kind of trading. Even though I do pretty well with it, I'm in the definite minority.

[Jim Nickerson]

Re: Sell Everything

Very much so - there must be a significant trend line break before shorting in my opinion. It actually did break in the early morning of 2/27 and I did establish short positions at that time.




I'm sure you're not the only one who wonders why I don't talk about my portfolio and trades much, and haven't joined that asset allotment thread.

There are three primary reasons, the first being that most of my trades are in the futures markets and that thread precludes futures. I never have been much of a stock guy and only own a few mutual funds.

The second is that I don't want to be viewed as encouraging or promoting futures trading - they can be very dangerous to one's financial health if one isn't well educated and doesn't have good money and risk management skills, etc.

The third and probably most important is that mostly I'm a short term investor/trader. Very recently, it's not unusual for me to open a trade in the morning and exit near the close - like I did last Wednesday on the S&P. I just don't have the confidence needed to carry leveraged or highly leveraged positions overnight.
My average trade length during the last year or so is under two weeks too... and I also don't want to encourage that kind of trading. Even though I do pretty well with it, I'm in the definite minority.

Thanks, Bart, for showing your colors. Why don't you put up a "play-like" asset allocation, perhaps that is what the others are anyway. I'm not trying to create work for you.

One other point, were the short positions on 2/27 a short-term position or are you still in them?

[bart]

Re: Sell Everything

Thanks, Bart, for showing your colors. Why don't you put up a "play-like" asset allocation, perhaps that is what the others are anyway. I'm not trying to create work for you.

One other point, were the short positions on 2/27 a short-term position or are you still in them?

I thought about putting up a "play" allocation but not only would it not be a fair picture of my approach and require "spare" time, some (not iTulip posters but folk on other boards) would undoubtedly use it as flame material.

Half of my 2/27 short position was closed on 2/27 itself after that huge spike down at around 2:30PM EST, and the other half was closed about a week later. Just in case it wasn't obvious, the trade last Wednesday was on the long side.

[Jim Nickerson]

Re: Sell Everything

I thought about putting up a "play" allocation but not only would it not be a fair picture of my approach and require "spare" time, some (not iTulip posters but folk on other boards) would undoubtedly use it as flame material.

Half of my 2/27 short position was closed on 2/27 itself after that huge spike down at around 2:30PM EST, and the other half was closed about a week later. Just in case it wasn't obvious, the trade last Wednesday was on the long side.

Gut genug.

[Sapiens]

Re: Sell Everything

I figure the ATMs will work no matter what,

http://news.bbc.co.uk/2/hi/business/1954363.stm

[Christoph von Gamm]

Re: Sell Everything

Didn't I hear that the ultimate advice of this news letter was to remain invested as the final run of the bubble produces outsized gains? (Not sell everything)

Key is that the bubble implosion might hit you in many ways, so one of the rules is to stay diversified by:
1. Asset class
2. Location

A good mix might be to stay diversitfied with:

• *30% Cash - both in current accounts or money market accounts on two different countries and currencies (i.e. Euro and Swiss Francs, 20% home currency, 10% foreign currency)
• *30% gold - as gold certificaties - this will do until the gold price reaches a certain trigger point - say $ 2'000,- After this trigger point the certificates holder guarantee should be revisited and maybe converted into real hard "20 grams per cube centimetre" gold.
• *30% commodities
• *10% a long running put on a major index, i.e. the Dow or Dax. Here the put goes up if the market goes down. If you take the right gear here, this will be enough to balance out the rest. If the market goes up, proably the rest goes up as well, maybe a bit less and your 10% (which you might lose out) will be covered by the gains of the gold and commodities.

Now you are at 100% of your fast disposible moneys. On top of this your house(s) should be halfways debt-free, means not leveraged to more than 65% to be on the safe side.

[EJ]

Re: Sell Everything

My point is more conceptual than substantive. Simply that when you own cash, you are invested in a security. A debt obligation of the Federal Reserve. As you noted in another thread, you can view it "... as a common share in USA, Inc.". Of course cash happens to be the most liquid asset, and it happens to be the unit we use to measure the value of other assets, but that latter property leads us to mistakenly believe that when we are in cash, we are not invested in anything. That somehow we have removed all risk from our portfolio. But since cash itself is an asset, you can't actually sell everything, you can only trade other assets for cash.

So without taking issue with the merits of Grantham's views (he's a pretty smart guy, and I wouldn't do so lightly ;)), he seems to be saying that cash will outperform all other asset classes. At least in the Finsterish lexicon, he is calling for deflation.

The implication for the investor is not so esoteric, however. He has to ask himself what his position on the value of the currency is. Many here are quite bearish, for example, on the value of the US dollar, and not without reason. It has been depreciating in value for most of its existence, and seems unlimited in supply. A large short position has been built up by the US government and homeowners across the country, which puts upward pressure on its value. But the helicopters are loaded and ready, and an ace pilot is in charge at the Federal Reserve.

For clarification, by "deflation" he means, and I mean, a debt deflation.

Whose debt? Everyone's, including the US government's. But it is the form of the deflation of the US government's debt that bears upon the question of the value of the dollar, "money," and "cash."

One of the potential avenues for a US government debt deflation is default, the other is currency depreciation. The iTulip take for quite a few years (e.g., our mock 2001 US bankrupcy filing -- Ha-ha!) is that the US is far more likely to choose debt deflation via the latter method than the former, as the latter is painful yet recoverable (see Can the US Have a Peso Problem?) while the former tends to lead to mass unemployment, and severe self-reinforcing economic and political crisis. The "Poom" event versus a "Poom" event is no mere post crash reflation but a one time write-off of US government debt via dollar depreciation.

We'll try to interview Grantham directly, but I have spoken with enough professional money managers over the years to conclude that none of them have debt deflation via currency depreciation on the radar. Jim Rogers has discussed it with me, but he's not a money manager. The most extreme financial markets condition that can be expressed in the context of a professional money manager's letter to clients is the kind of post-bubble panic and rush to liquidity that Grantham is talking about in his April letter. You won't see the potential for a US currency crisis discussed even in the Twin Focus client letters, and non-traditional crisis events are part of their model. (We picked them as a sponsor for a reason.)

The traditional crisis model is the standard script: risky emerging market assets sell off first, then less risky exotic domestic assets, cascading all the way down the risk ladder to US bonds, the "safest" of all. A lot of rarefied paper gets dumped for good old red, white, and blue bonds.

A scenario that includes a rush to non-US bonds and hard assets–capital fight from the US–does not fit the standard crisis model, and you will not hear Grantham talk about gold. The reason is simple: it's not that professional money managers cannot imagine it happening, but if it does happen it may not be the end of the world, but at least for a time it will be the end of their world. So why propose it? Under what conditions is that scenario relevant in the context of that client relationship? Think about it. Grantham is telling his portfolio manager clients that the most rational thing they can do is go to cash–but they can't do that. Such an event will be a boon for the hard assets crowd, however.

Think about it this way. Most professional money managers kept their clients in the stock market in 2000, and many lost a bundle. Guess where they are keeping their clients today? To Grantham's credit, he is talking them out of risky assets, now in fashion, and into relatively safe ones. But how will they be regarded if the US defaults on its foreign debt via depreciation? January 1999 we called for a 87% decline in the NASDAQ. In 2001 years we predicted a 50% decline in the dollar. The former turned out to be optimistic if you count all the companies that went out of business. The latter prediction may also turn out to be optimistic. If you believe that, do you want to hold a lot of long term US bonds? TIPS if you trust the house to index the resulting inflation accurately, T-bills otherwise.

Grantham's letter analyzed in detail over on the Select forums next week.

[raja]

Re: Sell Everything

If you believe that, do you want to hold a lot of long term US bonds? TIPS if you trust the house to index the resulting inflation accurately, T-bills otherwise.

Long term bonds -- definitely not

TIPS -- Even if not indexed correctly, how far could it go without becoming obvious fraud -- not too far, I suspect. In my opinion, it's a lot easier to get away with printing lots of dollars "in the national interest" than it is to fraudulently manipulate the CPI in an extreme way.
So even if TIPS pay off somewhat less than expected, TIPS owners would be still be relatively wealthy when compared to those who lost a huge percent of their wealth through stocks and dollar depreciation.

T-Bills -- Continually reinvesting short-term T-bills may have a similar effect as TIPS. The T-bill rate should rise with inflation because the government must pay ever-rising interest to get people to invest.

Gold -- In a dollar depreciation scenario, gold would seem to be a great investment, as long as it was possible to sell before the bubble collapsed. Since paper gold can be sold more rapidly than physical in a feverish bubble situation because of physical-gold-trading infrastructure limitations, gold ETFs and other easily traded paper gold would seem preferrable.

On the other hand, there are scenarios in which the value of gold could plummet. To hedge against this, TIPS and T-bills might be effective.

[grapejelly]

Re: Sell Everything

The current scheme is continual currency depreciation that is camouflauged by "good" CPI, "core rate" and "economic growth" numbers.

I expect this to continue and it could continue for much, much longer.

The trouble with "sell everything" is that you could sell everything five years too early.

OTOH, it could happen tomorrow.

I favor a smattering of junior mining stocks (combination of explorers and a few junior producers with big lottery ticket upside), 13 week t-bills, and mostly physical precious metals.

I cannot emphasize enough how important physical metal is.

That's because the real danger that few talk about is counter-party risk.

Paper PMs are a liability of someone else.

They are not really PMs.

Paper PM products can default. They can be seized. They are liabilities of someone else. They can seize up in the event of a systemic financial crisis.

The key to surviving a severe financial disaster is to anticipate counter party risk and take steps to avoid being ruined in the event there is a systemic blow-up of the financial system. And if there isn't, you still want to preserve your wealth and participate in a hoped-for upside.

Precious metals in your physical possession serve this purpose.

[raja]

Re: Sell Everything

I cannot emphasize enough how important physical metal is.
That's because the real danger that few talk about is counter-party risk.
Paper PM products can default. They can be seized. They are liabilities of someone else. They can seize up in the event of a systemic financial crisis.
The key to surviving a severe financial disaster is to anticipate counter party risk and take steps to avoid being ruined in the event there is a systemic blow-up of the financial system. And if there isn't, you still want to preserve your wealth and participate in a hoped-for upside.
Precious metals in your physical possession serve this purpose.

Grapejelly,

I would like to believe in the worthiness physical gold, and once did. But when I thought through several future finacial scenarios, I changed my opinion.

It seems certain that in a scenario where fiat currency worldwide becomes worthless, gold would be desirable . . . along with seeds, guns and a willingness to shoot your starving neighbors. But I give it a less than 5% probability. Other than that dire scenario, I can't picture a situation in which physical gold is necessary or desirable.

Could you please describe what you think would have to occur for paper gold, like a gold ETF, to fail? What type of systemic "blow-up of the financial system" are you talking about?

In one type of "blow-up", where the dollar crumbles and stocks crash, I would think that paper gold companies would be especially flush, with money pouring in. Can you elaborate on the "counter-party risk"? Who is going to "seize" the paper gold?

Thanks.

[FRED]

Re: Sell Everything

Just a mild observation...

In a thread entitled Sell Everything, there has been no mention made of shorting or using any of the shorting funds or ETFs designed for it or even the use of put options.

Anyone know about this one?

Shorts junk bonds... AFBIX

[spunky]

Re: Sell Everything

It doesnt have to blow up. I cant remember where I saw the article that showed there arent enough above ground silver depoists to cover the paper issued. Kinda like fractional reserve banking . Hardness is hard, paper is paper. I understand the problem of cashing in your gold/silver bullion, but that is something ya just gotta plan ahead for. Nice to wait for the " new " dollar to appear and stabilize. Unless we get a pandemic on top of a world/regional war I dont see a " doomsday" scenario either

[Pilot Fish]

Re: Sell Everything

Interesting. I was not at all familiar with Grantham or his views but I have been sitting in cash (including foreign) and sovereign bonds for some time now (with no regrets). And I didn't even consider it to be an "end of the world" allocation choice. Just seemed like a good, relatively safe idea. Nice to know I will eventually prove to be as smart (or equally misguided) as such an esteemed gentleman.

[bart]

Re: Sell Everything

Grapejelly,

I would like to believe in the worthiness physical gold, and once did. But when I thought through several future finacial scenarios, I changed my opinion.

It seems certain that in a scenario where fiat currency worldwide becomes worthless, gold would be desirable . . . along with seeds, guns and a willingness to shoot your starving neighbors. But I give it a less than 5% probability. Other than that dire scenario, I can't picture a situation in which physical gold is necessary or desirable.

Could you please describe what you think would have to occur for paper gold, like a gold ETF, to fail? What type of systemic "blow-up of the financial system" are you talking about?

In one type of "blow-up", where the dollar crumbles and stocks crash, I would think that paper gold companies would be especially flush, with money pouring in. Can you elaborate on the "counter-party risk"? Who is going to "seize" the paper gold?

Thanks.

Study the early 1930s, the late 1970s, and Argentina earlier this decade as just three possible scenarios.