Wednesday, October 13, 2010

Big Picture Focus

It is no secret to long time readers of this site that I love to focus on long term macro-economic trends.  I believe that markets move in cycles (tending to last 20-25 years) and that the best way to learn where we are moving in the future is to study the past.

My most popular cycle of discussion is stocks vs. commodities.  Stocks entered a bull market in 1980 which topped in the year 2000.  Since that point we have been in a long term bear market that we are currently in the heart of in 2010.

Commodities entered a long term bear market in 1980 that ended in 2000.  Since that point we have entered in a long term bull market that we are currently in the heart of in 2010.

Running concurrent with these two cycles is the multi-decade ending of the United States dominance as the global economic leader.  Depending on how you measure it, this point occurred in the year 2000 (real stock market high) or in 2007 (total national wealth high when factoring in real estate).

Many assume that the United States will decline slowly as the emerging markets fill the void in the global economic environment.  My view is that there will be no slow decline, there will be a collapse.

The collapse of our country in economic terms will come in the form of national debt default.  We will not have a formal default on our debt where we will ask our creditors to take a portion of the money owed, we will pay them back with dollars created from a printing press.

This event is referred to as the devaluation of the currency.  Creditors will be paid back with dollars that are worth far less than what was originally lent out.  Those dollars will purchase less oil, food, housing, clothes, and gold.

This will be the most important economic event of this century.  It will provide the greatest wealth transfer the world has ever witnessed.  Investors that have continued to invest in commodities over the past decade in anticipation of this event are now seeing the end game unfold.

Your goal as an investor is not to secure a 10, 20, or 30% return on your investment in gold next year.  Your goal is to accumulate as many ounces of gold, barrels of oil, bushels of wheat, and shares of companies that invest in or will benefit by these assets rising in price.  The dollar value of your assets will have no meaning when we reach the end of this cycle. 

The reason I want to focus on the endgame is that I see a very large pull back in prices coming in the commodities sector.  The bullish sentiment toward gold, silver, copper, corn, soy beans, oil, and everything else I love is at a fever picture as of this writing.

If prices pull back, this will be a tremendous opportunity to add to positions.  This is the reason I have be recommending holding your current investment positions, but keeping new incoming cash in just that: cash, as we wait for better opportunities to enter.

Warren Buffett said that he is confident to invest when people are afraid, and he is afraid to invest when people are confident.

I could not agree more.

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