All those empty houses on all that good farmland gets investor thinking.
Presenting part one of the final two-part series from the June Stockhouse Macroeconomics session. To wrap up, participants were asked to share their summary thoughts on what investors might do to protect themselves from the ensuing economic decline. In “Foreclosures for farms,” littleguy123 and frontline_jason kick things off below.
Please add your comments at the bottom of the page, and enjoy!
[Editor’s note: Posts have been edited for punctuation, spelling, grammar and length.]
SH_Arber: I have two questions for everyone to think about and answer as part of today's wrap up.
1) As an investor, what is one thing that you can do given today's macro climate, and why? Why do you think it's a good idea / trade, I mean. I'd like to see something a little more specific than "buy commodities" - we're inundated with that in mainstream media already. I think StilesBC is the only one so far to disclose a few actual positions. Let's hear one pick / angle from everyone, with brief analysis / background / forecast for success. This could be short term or long term.
2) What is one thing, the first thing, that ought to be done to, in the broadest sense of the term, "fix" the U.S. economy? It has to be an active thing - but it could be a negative action. For example, you might suggest that the Fed not bail out any more investment banks that are poised for destruction as a first step toward teaching a lesson in what happens when you muck around with risk in the markets. Either way, you must argue why your pick for a first step should be the first step (as opposed to anything else that might be a first step).
Don't get too big / broad with any of these ideas - drill down and get practical.
If everyone has a different investment idea and a different first "fix," we'll end up with a mini-book of thoughts that might have some practical value.
littleguy123: 1) A top priority for investors should be to upgrade and diversify their sources of market news/information. We could easily call this new era of communication the Age of Propaganda - since the instant access which most people now have to information (the internet, for instance) is an ideal habitat for the proliferation (and saturation) of propaganda.
2) "Fix the U.S. economy?" Wow, I've got a contributor/heckler on my blog who is wondering why it's easier for me to criticize the U.S.'s problems rather than fix them. My response is that not having created the problems, it's unreasonable to expect a solution from a source with modest levels of understanding, and even more modest resources.
One possible/partial fix may turn out to be a somewhat tongue-in-cheek post I did on my blog - after hearing about how much interest there was in the auction of a plot of farmland in Saskatchewan. Given that it now appears that millions of houses in the U.S. (and entire suburbs) may simply end up getting bulldozed under, converting some of that soon-to-be-empty land back to farmland would seem to be a process which at least leads to an economically viable option, given soaring demand for food, and sky-high commodity prices.
Also, with the U.S. structuring its economy to become a "plantation economy" (dismantling manufacturing, while continuing to escalate agricultural subsidies), utilizing what is now residential land in that manner would be “swimming with the currents” rather than against them.
frontline_jason: Gentlemen, it was a real pleasure discussing the problems of the "free" world with you. I really learned a lot and hope that we can do this again soon. I am finalizing my review for CFA but wanted to get some final words in before Rob de-commissions el grupo.
I think we are all on the same page that the credit crunch has yet to rear its ugliest face and that the world will continue to experience a deleveraging of proportions unseen in our lifetimes. The U.S. being the epicenter will be the hardest hit by this, and will no doubt be the structurally weakest of the large economies in the coming years. I am of the view that because there has already been a shift towards the monetization of crappy paper (meaning replacement of one kind of crappy paper with another), a crisis in the dollar is inevitable.
Despite its ramblings, the Fed/government has selected short-term bailout over long-term stability, so the path for the next 2-5 years has already been laid out. What concerns me is the decisions that the government will take following the dollar crisis. Despite the aggregate economy being in a shambles, there are still lots of American companies that make useful stuff, generate wealth, and have strong balance sheets. Outside of the U.S., massive infrastructure spending will continue, so don't be surprised if foreigners ramp up buying of ultra-cheap (in relative terms) industrial, materials, energy, and technology companies domiciled in the States.
The U.S., which will be teetering on depression in the next cycle, will have a huge decision to make. Fortunately, there are only two main choices: 1) Let the foreigners buy their companies; or 2) Impose protectionist policies because it is simply "undesirable" for America to be at the mercy of foreigners (enter the uneducated white supremacists with their guns). Some may argue that protectionism won't be an issue this time around because the American government has changed its ways in letting outside investors buy massive stakes in the big banks, but I beg to differ. The banks are worthless and built on leverage (debt/liabilities), so of course the government will let others buy stakes in them. Compare this to real firms in the real economy that actually produce value-added goods or, in the case of primary industry firms, goods that are tangible. Selling liabilities is no problem, but selling assets? Therein lies the point of contention.
That being said, I think it's time for me to outline my bets for the next cycle. The main theme is that against a backdrop of a secular rise in prices, it will be tough to make money. An investor's focus must switch from creating wealth through investment to preserving it (in real terms). Price increases eat at profit margins in competitive industries, so asset selection will be more difficult that in the past 25 years. That being said, there are still a few sectors that are poised to deliver significant gains in the coming years. Note that I don't recommend individual stocks - I'm best at top-down and will leave company selection to those who have more intimate knowledge of specific firms. However, I outline a few main themes below... many more in my launch piece but I can't give everything away just yet.
1) Hold core positions in "real" assets (except real estate)
As the pace of price rises accelerates along with monetary inflation, long-term inflation expectations will rise and provide further momentum for the commodity complex. However, the bigger story may be the supply/demand imbalance between massive infrastructure spending in emerging countries and the increasing frequency of commodity shortages following 25 years of under-investment in this sector. Until supply catches up with demand the trend of geometric increase in primary goods will continue. With the advent of ETFs, there are plenty of ways for retail investors to directly play the commodity complex, and I strongly believe that in the current environment direct holdings of physical commodities should comprise a core position of a portfolio. On the property front, don't buy in the "bust" countries is all I can say. If property is your thing, look for places that haven't been over-built and over-bought.
2) Favor companies with strong balance sheets
The rationale behind this theme is virtually identical to my currency recommendation. Credit will be much harder to come by in the future, and should one be "fortunate" to be able to borrow, the terms will likely be materially less favorable that they have been in recent years. Following this logic, companies that are less levered (to leverage) will have the best chances of survival. Even better if they have positive net cash positions.
3) Favor cash over bonds. For fixed-income investors, shorten duration and avoid spread product and most corporates
Higher prices mean higher interest rates and lower bond prices. Higher rates also mean slower growth, which adds an additional dimension of risk to corporate bonds. Furthermore, the level of disenchantment with fixed-income products is extremely high, and will take several years for the stigma surrounding this asset class to dissipate. Quality is the key word here, and the only sector with the potential to make money is high-quality (top-notch investment-grade) corporates in real industries: The value is there and has the highest chance of outperforming other types of bonds. Spread product in the U.S. is flat out worthless: The country is bankrupt, so risking your principal for a few extra basis points does not make sense in this environment.
I'm signing off, but will be in touch after my exam! Cheers all, Jason :).
This group discussion was conducted with members of the Stockhouse community.
Next: Participants gabrielgray, arnoldj and StilesBC share their opinions on what’s happening in the economy and what to do about it in the last of the Macroeconomics group articles.
Archive
Investor groups launch with macroeconomics discussion
Inflation and money supply, part I: Treasuries crowd bonds
Inflation and money supply, part II: Buyer’s remorse
Inflation and money supply, part III: Indeflationists unite
Inflation and money supply, part IV: Measuring money
Inflation and money supply, part V: Derivative “Death Star”
Oil supply, oil demand: Is oil in a bubble?
Housing crisis redux: Where do we go from here?
U.S. dollar devaluation not the only currency bet in town
Government and liberty, part I: Size does matter
Government and liberty, part II: A utopian fantasy
Government and liberty, part III: An optimist grown old
Spin-offs
Inflation debate stirs investors
Oil speculation theory taken to the woodshed
Oil prices: A critique
