It is my hope
that in the following pages this article will help you understand how the
market is not linear but is in fact very cyclic. That the market
is much like the seasons of the year with seasons of growth (Bull) and
seasons of loss (Bear). It is by understanding the market as a cyclic
entity that the investor can then act proactively to maximize and protect
their financial nest egg. Much like the surfer who knows how to use
the energy of the wave to maximize their ride and exit so as to not be
crashed onto the shore. It is also important to remember that
each of us have our own investment cycles as it relates to our life cycle.
The following example will offer a scenario to explain why it is so important
to understand cycles from both perspectives.
Let's say we
have two investors, Bob and Sue. It is the early 1960’s and Bob in
his early 60’s is about to retire. Sue on the other hand is in her
twenties and just getting started. As you can see each is in different
part of their life-cycles and investment cycles. In the 60’s the
Stock Market had been on a long-term bull. The market had climbed
consistently since the end of the 1940’s and things were looking good.
Thus it probably made sense for both to trust their investment would be
safe in the market. Little did they realize in 1966 the country would
enter a bear market that would last until the early 1980’s. Although
this may have been disheartening to Sue it would have been devastating
for Bob who was now retired and watching his portfolio crash. That
is if they stayed “in the market for the long-term”. The reality
is this same scenario replayed itself around 1929, 1966, and even 2000
although some might think this isn’t the case as the market is now over
13,000. The question is the market’s value compared to what?
For a great discussion please check out this link. http://goldsilver.com/the_dow_is_crashing.php
By studying
the markets from a historical perspective there seems to be about a 17
year cycle where particular strategies or investment classes will rise
or fall. In the 50’s to mid 60’s stocks were king. From the
60’s to early 1980’s commodities became king and stocks tanked. In
the late 70’s and through the 80’s the Nikkei became king as commodities
crashed. Then from the 80’s through 2000 the Stock Market became
king again. As you can see, understanding these cycles can greatly
help you in maximizing investment returns. It can also help you to
avoid being on the wrong side of a particular investment cycle as it relates
to your life cycle. This is really important if you’re just about
to retire and reinvesting for the long-term may not be possible.
An interesting note here is looking at Sue as an investor. She started
in a bull stock market, survived a long a bear stock market, rejoiced in
the biggest stock market balloon in history and watched it crash again
just prior to her retirement years. Now that’s a cycle.
Understanding
Cyclic Downturns
It is important
to make a point about the nature of cyclic downturns and the common belief
they are fast and hard. An event similar to a crash of 29 or a black
Tuesday of the 1980’s. The reality is Bear Markets tend to be long
in duration with many deceptive upturns and downturns. This misunderstanding
has led many an investor to stay in the market longer than they should
have as it seemed (and they were told) the market had finally bottomed
and was bouncing back. The bear market from 1966 to 1976 is a perfect
example of a time when many investors stayed in stocks believing a bottom
had been set and a new Bull was about to begin. Many investors lost
60% or more of their portfolio as they rode the bear all the way to the
bottom. The commodities market of the early 1980’s is the same.
Although there
is a great deal more to discuss about cycles this brief introduction will
help start you begin an interesting path of study as you do your own due
diligence. We will now move from discussing how historical cycles
can help you in understanding the ebb and flows of investing to the study
of trends as a way of projecting what may occur in the future as it pertains
to your financial portfolio. This isn’t consult your psychic type
of stuff, but a simple way to look at current and future facts and assessing
what their effects will be on the financial world in the years ahead.
Trends
A trend is
basically a movement in a general direction over time. Of course
there are trends in style, habits and all kinds of things. The trends
we will be exploring are those macro trends that will affect us as investors
as well as people. By seriously researching, studying and contemplating
our current status socially, geopolitically, economically, environmentally,
and demographically all of us have the potential to understand what will
probably occur in the future and then position ourselves to best succeed
and prosper. And remember, even in bad times many opportunities exist
for those with the foresight to understand these cycles and strategically
position themselves to benefit.
Here is an
example. Lets say we have the opportunity to buy a large tract of
land just outside a quickly growing city where projected development will
reach the land in a matter of a few years. We see that the trend
in growth and development will make this land very valuable so we position
ourselves to benefit by buying the property and holding it until the right
moment. As you can see, the study of trends can be a very important
part of your financial decision making process and isn’t that difficult
with a bit of common sense.
Trends Are
Your Friends… Maybe
Even though
the understanding of trends is important, it is not something many of do
as part of our regular investment planning. When was the last time
your financial advisor discussed the impact of peak oil on your portfolio?
Or how the retiring of the Baby Boomers will affect stocks, bonds and real
estate? Over the past few years I have posed similar questions
to friends and family and found few have thought about such issues.
Even fewer have ever had their financial advisors or brokers broach the
topic. Generally, people rely on recent history in projecting forward
their investment strategies. Having read the above section on cycles
you can see how this might not be the best strategy.
This time
it is Different!
Most of us
are familiar with the old saying, usually offered up at the top of a bubble,
that this time it will be different. We heard it in 2000 with the
Tech bubble when people said the stock markets would continue to rise a
20% a year for years into the future because “this time it is different”.
Again, we heard this in 2005 with the housing bubble. The following
discussion on trends will be presented under the caveat that this time
it really is different. Each of the trends covered below are very
different as we have never faced these issues in the history of mankind.
We have never faced a world with 6.5 soon to be 9 billion people.
We have never faced living with the truly finite resources of a small world
with a huge population. We have never faced a world addicted to and
dependent on an energy source that has peaked where demand will quickly
outpace supply. We have never faced global warming or the ecosystem
collapses we are now experiencing. And we have never faced a world
in which our lives are dependent on a fragile global network where the
failure of one link in this daisy chain can result in millions of people
dying.
As investors,
and members of the web of life currently hurling through space on this
little planet of ours, it is important to fully understand that things
are really different this time. Unlike in the past (with the exception
of nuclear war) this is the first time in history that our actions will
affect both the planet and the lives of our children’s children.
The following
trends are best described as macro in nature. Meaning they are very
large scale and will impact the world not just for years but decades.
By understanding these trends you can plan for the future both in making
good investments and in protecting yourself and family. Many investors
make the mistake of looking at trends over the short-term losing sight
of the more powerful macro trends. A perfect example are those who
purchased gold and silver early in this bull run. After watching
the daily ups and downs many sold in fear as soon as the market jumped
way up or way down. The daily, weekly or monthly volatility drove
them crazy. By understanding the larger trends and looking at long-term
charts, others saw the volatility for what it was and have continued to
ride the metals bull to its current high. The moral of the story
is to keep a focus on the big picture. So lets’ look at a number
of important trends.
Population
v. Resources
For the first
time in the history of mankind, and the planet for that matter, the human
population has literally increased to the point where it threatens all
life on earth. We have reached, or are about to reach, the sustainable
carrying capacity of our species on the planet. At least in the manner
and rate in which we are now using and depleting these resources.
Understanding and acting on this trend will be one of the most important
investment actions a person can make in the future. It will be important
to understand the impact of a global competition for natural resources.
Will humanity join together to solve the issue as a team or will we begin
to compete with the result being great conflicts and wars? What have
our past behaviors been in this regard? These are important questions
for each of us to be asking. And don’t expect to hear them from either
your broker or the politicians we call “leaders”.
Understanding
that resources are limited should inspire the thoughtful investor to look
at real assets as a large demand will only increase the value of limited
resources. Think gold, silver, oil, energy, food commodities, industrial
metals/materials, trees or hardwoods, or any other real asset that is needed
by a quickly growing population. Food security is becoming an issue
we will all face and should be included in our long-term planning.
This topic is covered more at www.intentionallivingcenter.com/problem.
An Empire
Built on Debt
With over
8 trillion in on record debt, about 50 trillion in obligations and the
need to borrow over 2 billion dollars a day from foreigners, the United
States financial system is at serious risk. Although those who have
got the country into this mess will try to convince us that this is perfectly
fine, a real study of the issue casts seriously doubts about this Pollyanna
view. Even worse news is the debt of American households is at the
highest rate in history, savings are at all time lows, and the ATM known
as home equity refinancing is now broken. To make it even worse the
US is no longer a manufacturing or producing nation but a consuming nation
with real wages that are falling. It would be easy to continue as
the list is incredibly long and I have just begun to open this Pandora’s
Box, but that would just make us all suicidal.
When it comes
to investing in paper assets it is a bit like a Dirty Harry movie where
all of us need to ask ourselves; Do you feel lucky? Do ya?
The global financial system has been built on a wave of liquidity that
has been literally created out of thin air. Or a printing press if
you prefer. This flood of liquidity is responsible for bubbles in
stocks, housing and credit and all of this is backed by a little known
device called a derivative. A financial device Warren Buffet so aptly
calls a financial weapon of mass destruction. These derivatives are
growing almost exponentially and now stand at about $400 trillion or 10
times the entire yearly global economic output. The paper financial
system is in serious trouble and all of us as investors need to fully understand
this and take action to protect ourselves. 321gold is a great website
for interesting and informative articles on this issue and is highly recommended
as a way of understanding this issue more clearly.
Peak Oil
Many EscapeArtist
readers are probably familiar with the concept of peak oil. For those
of you who are not, peak oil refers to the point in time when the production
of oil finally peaks, plateaus, and then begins to fall. This takes
place as demand continues to rise creating ever growing deficits between
the demand and supply. As oil is the primary fuel for the world’s
energy needs, you can imagine what types of conflicts will arise because
of this. Iraq is just one of the many conflicts to come as nations
fight for control of this most precious commodity. If you’re wondering
why this topic isn’t a major issue in the press- imagine the crisis it
would provoke in the minds of people, the unwanted exposure of our government’s
true intentions, and the potential financial backlash to those who profit
from the current energy policies as an educated population forces higher
mileage standards, alternative energy sources and strict conservation practices.
This is an issue those in power don’t really wish to see discussed openly
or in detail. Here is an introduction to how our political leaders
are handling the issue. www.fromthewilderness.com/free/ww3/120505_big_crisis.shtml
Peak oil will
impact every aspect of our daily lives. In addition to sending fuel
prices much higher it will send prices of every food product and consumer
good to levels few people have considered or expect. Expect to see
the first wave of these increases in the coming months as large amounts
of corn are directed into the inefficient making of ethanol and taken out
of the food supply. This will impact the price of meat as feed prices
rise and any food that has either corn or corn syrup as an ingredient.
These future cost increases will need to be factored into every portfolio
if one is to retain a standard of living they wish for in retirement.
Either that or plan for a decrease in one’s standard of living. You
can read more about peak oil at www.intentionallivingcenter.com/peakoil.
The Boomer
Generation Retires
If
the above challenges weren’t enough, along comes the retirement of largest
demographic group in the history of the country. At a time when the
country is extremely in the red with promises to pay huge retirement and
Medicare benefits to this group, one has to ask how their retirement will
affect the financial world. Imagine 77 million seniors wanting pensions
and services from corporations and governments who have under funded their
retirement obligations for years. Consider also how a government
up to its eyeballs in debt will meet these obligations. Will the
government resort to higher taxes, defaulting, or monetizing the debt by
printing money? If I was a betting man, and I am, I’d wager a yes
on all three.
Since research
has demonstrated that Boomers have not saved or invested wisely for their
retirement years, smart investors should be asking themselves what this
trend will mean to them. For a very enlightening look at this issue
I recommend readers go to http://the-great-retirement-experiment.com/ for
what is probably the best discussion of the issue. For you younger
folks, you might want to consider what it is that these soon to be old
geasers will need in their later years and figure ways to strategically
position yourself accordingly. (As a boomer I can call myself an
old geaser so don’t send me hate mail for not being PC.)
Global Warming
& Environmental Degradation
Last, but
not least, on this very short list of future trends is the big one that
is now taking center stage in the global media. I won’t really go
into this as problem as it is being pointed out everywhere you look. I would like to discuss one point on this issue. For years the Global
Warming argument has been batted back and forth. In reality this
has been a great ruse or red herring used to keep people arguing and not
dealing with the comprehensive issue. Even if global warming was
not an issue, we are destroying ecosystems at such a rate we will be destroying
ourselves soon enough. Today there are still those arguing the “scientific
merits” of the issue. Sort of like a bunch of engineers arguing whether
or not the Titanic can actually sink as it slowly disappears below the
waterline.
As a trend
we know that there will be a lot of issues we will have no control over
and as of yet don’t really understand what may take place. We do
know weather trends will change, sea levels are already rising, and storm
veracity seems to be increasing. So, it is a good bet that investments
in insurance companies may not be lucrative as they once were. More
seriously, it may be time to seriously look at ecological investments as
there will probably be an incredible growth curve in the use of these technologies
in the future. In fact, every dollar we invest in environmental solutions
brings us a little closer to a better world.
Some Final
Thoughts
The trends
above are quite ominous and foreboding yet within them are a lot of great
opportunities for those of us who are willing to take the time to educate
ourselves to the cycles and trends and then position ourselves to benefit
from them. It isn’t rocket science but mostly common sense.
As readers of Escape Artist, you probably already possess a streak of contrarian
spirit so the fact that this will likely conflict with the information
handed out by the mainstream financial world shouldn’t be a problem.
It might be for family and friends.
After finishing
this article I hope you will sit down and think about each of these trends
as well as explore where we are at when it comes to cycles. I believe
it will be obvious that as things move forward there will be much greater
focus on true, real assets. Where in the past 20 years paper assets
were king, a new cycle has now begun and, if the trends mentioned above
have anything to do with it, should last for many years into the future.
You can contact
me at www.intentionallivingcenter.com if you have questions or would like additional references. It is my hope to explore this issue in greater detail in the future as
it will affect all of us whether we live here or are able to make that
final escape.
Until then,
happy adventures.
Tim Jacobson is the manager of the Intentional Living and Learning Centre Trust and can be contacted at www.intentionallivingcenter.com where the group works to develop projects and strategies for sustainable living.
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