I just finished reading a book from one of my financial mentors.
The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation is by A. Gary Shilling. Back when I used to spend hours every day watching the clowns on CNBC pump their fists about how great everything was, there were few voices of reason. One of them was Gary Shilling. Like me, he saw early on how the housing bubble was not just a subprime issue and how the losses would go beyond housing and damage the financial markets. That was a very unpopular opinion to have during the drunken days of the housing bubble.
The Art of Delveraging begins with Gary telling us about the 7 great calls he made during his career. Some Amazon reviewers seems to take issue with his bragging. I don’t. Gary has been successful because he often went against the consensus. This invites attacks right up until the moment you are proven right. I don’t know how many times I saw other financial experts rudely berate Gary on CNBC. He always kept his cool and came off as a true gentlemen. He earned my respect. If after ~50 years in the game he wants to write 100 pages saying what he got right without being interrupted, then God bless him.
Hopefully other readers will savior the wisdom of the 7 great calls. This is how a great researcher sized up the economic landscape at different points in our history. His greatest call in my opinion was buying long-term Treasury bonds from the very early 80s to the depth of the 2008-2009 financial crisis. In the early 1980s inflation was very high and so were interest rates. Shilling’s research showed that while everyone else was expecting more and more inflation that the opposite was true. By investing in high interest bonds, the value of your investment goes up when interest rates fall. And that is exactly what happened.
Most investors find Treasury bonds boring, because they focus on the interest. Gary focuses on appreciation. He writes:
A decline in yields from 4.0 percent in July 2010 to 3.0 percent may not sounds like much, but the bond price would appreciate 20 percent. If it occurs over two years, then two years’ worth of interest is collected, and the total return on the 30-year Treasury would be 28 percent. One a 30-year zero-coupon Treasury, which pays no interest but is issued at discount, the total return would be 34 percent.
If you’ve been actively following the banking and housing crisis over the past few years there are sections you might want to skim through. But for others, this book also serves as a great concise economic history book for the last decade.
Gary Shilling has been in the deflation camp since the early 1980s and is still there. After he makes his case for further deflation he concludes with 12 investments to sell or avoid and 10 investments to buy in the coming decade. This book serves as a good balance between the frat boy everything-is-wonderful nonsense in the financial media and the get-your-gun-the-end-of-the-world-is-near message coming out of the financial blogosphere.
Usually I don’t mind waiting a few months or years to get my hands on a library copy of a book. Not right now though. Here are four books that either just came out or will be coming out before the end of 2010 that I can’t wait to read.
The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation by A. Gary Shilling came out last week. Shilling is one of my top 5 financial mentors, the others being Michael Shedlock, Karl Denninger, John Mauldin and Ed Easterling. I could rattle off his resume, but trust me when I say he knows his stuff. He is also an excellent writer and unlike many of the guests on CNBC, he is polite and civil.
The New Evolution Diet: What Our Paleolithic Ancestors Can Teach Us about Weight Loss, Fitness, and Aging is by Arthur De Vany. Art De Vany is my #1 mentor when it comes to nutrition. His interview with T-Whatever that I read in late 2007 changed my life. I’m leaner, more healthy and more confident in myself thanks in large part to Arthur De Vany. There are many smart people in the evolutionary fitness field. Nobody is as wise.
The Bed of Procrustes: Philosophical and Practical Aphorisms is by Nassim Nicholas Taleb. I got to read some of this book prior to release. Lots of excellent snippets of wisdom from one of my favorite thinkers.
The 4-Hour Body: An Uncommon Guide to Rapid Fat-Loss, Incredible Sex, and Becoming Superhuman is by Timothy Ferriss. I expect much of the information in this book won’t be new for me. However, I do expect to learn a trick or two to improve my fitness level. If I get just one great idea then this book will have been worth it.
I haven’t done a financial post in a while. There are a few reasons.
- My interests have moved. In addition to my new websiteCoffee Hero, I am also now researching nutrition and fitness with the same intensity I did for real estate in 2005-2006 and the stock market in 2007-2008.
- My thesis has not changed. I am still bearish.
Right now we are in the eye of the hurricane. For weeks we’ve heard economists talk about recovery and green shoots. Nonsense. Note that these economists are the same ones the missed the recession and credit crisis in the forecasts. For me, I need to see two things before I can believe a recovery is on the way.
- Bad debt must be defaulted on and removed from the system. Mathematically we can not grow from these levels of debt. Denying the true value of assets is only delaying the reality. Japan went through a 20 year period of denial. We are in a deflationary period. Credit is being pulled from the system at a historic rate. We have too many houses, too many cars, too many malls and too many of about anything created via leveraged financing. There is no growth around the corner to absorb the excesses.
- The criminals must prosecuted. At the height of every bull market, there are individuals that play fast and loose with the law.Boesky and Milken in the 1980s.Bernie Ebbers and the boys at Enron during the dot-com days. There will be no market bottom until you start seeing old rich guys in handcuffs. Everyone knows the financial markets have been riddled with fraud for the past few years. Where are the arrests? The problem with this recession is not only have we not gone after the criminals, but the bailouts have created another wave of fraud. Until investors have their faith restored that laws will be enforced and the accounting is honest, they will not take risks, start companies and hire workers. They will sit on the sidelines.
If you are still long the stock market now, I’d be selling. You got a nice bounce. The boys at the top are selling. From Insiders Exit Shares at the Fastest Pace in Two Years:
Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies prospects.
The captains of industry are telling you recovery is on the way, while they sell their stock to you. P/E ratios are now insanely high. The rally we have experienced is common in bear markets. The bounce between hope and fear is human nature.
I stand by my 2009 Financial Predictions. Even though I was too optimistic on unemployment, I think everything else still has a decent chance of playing out this year.
I changed my mind and accepted an offer to extend my lease for 6 months with a 5% reduction in rent. I’m sure I could have found a cheaper place, but my back injury made me reassess the move.
For almost a week when I should have been looking for new places, I could barely walk. Then when I could walk fine, I looked at a few units, but the pain flared up again. With only two weeks to find a new place and move myself (heavy couch), I decided it wasn’t wise to move at this time.
My place is fine and I love my neighborhood. I will count this as a minor victory. Just by asking my landlord to make a counter offer, I got a 3.5% increase in rent lowered to a 5% reduction. I also got the terms of the lease reduced from 12 months to 6 months. The monthly savings will pay for my cell phone and Netflix bills. Since I expect rents to continue to slide, by November I expect even lower rent or a better apartment for a similar amount.
If your lease is coming due, come armed with data and ask your landlord for a rate reduction. Even if you have no intention of moving, the worst they can say is no.
As deflationary pressure builds in the economy, cash becomes more valuable. It goes to reason that those with cash are now in a strong position to ask for a better deal. I have cash and like everyone else, I’d like a better deal. I decided to start making Counter Offers when confronted with a request for my cash.
I’ve been to Tijuana and Paraguay. I know how this game is played. Let the fun begin.
- Gym Membership – If you have a membership with a big name gym with an 800 phone number, I encourage you to call up and cancel your membership. When asked why you wish to cancel, tell them times are tough and you need to save money. They will almost certainly cut you some deal. If they don’t, you are always free to hang up and try again next month. I detailed this a while back in the post Glitter Gym Hijinks.
Anyway, my current gym would not budge on price (too many New Years customers), so I asked them to extend my 3 month membership by 2 weeks. They did. That is 15% free, just for asking. Score!
- VOIP – My phone company Vonage did something very dumb. They sent me a direct mail offering me 2 months of free service if I come back and restart service. This was dumb, because I never left. So I called them up and asked to cancel my service. When they asked why, I told them so I could rejoin and get 2 months free with the offer I received in the mail. They kindly offered me 2 months free when I pointed this out to them. Score!
- Satellite Radio – My 4 year membership with XM was finally up. Now I love XM dearly, but I wasn’t about to let them know. I called up to cancel. I told them I like the service, but the online player has acted up since the merger (true) and the price is too high. They offered me a 50% rate reduction to extend for 1 year. Score!
I was 3 for 3 this week. When someone asks for your cash, make them a Counter Offer. Be prepared to hang up or walk away. The worst they can say is no.
All day long I’ve reading, researching and thinking about Paulson’s No Banker Left Behind Plan and what is going to happen to the economy. This post isn’t about the guilty parties that got us in this bailout mess or why this plan is a going to be a disaster. Instead I want to try and guess how this all ends. As a student of economic history, I think we may be fast approaching a pivotal moment.
I see three possible outcomes:
- Paulson and Bernanke will succeed and the market and economy will be put right back on track.
- Deflation. (Cash is king, Debt is slavery)
- Hyper-Inflation. (Cash is trash, Debt becomes -relatively- cheaper)
Outcome one is a fairy tale. If you are long in equities now, you are betting against history.
Up until the bailout, I’ve been firmly in the deflation camp. Deflation is not declining prices, but a decline in the money supply caused by a destruction of credit. Loans go bad, banks collapse and lending tightens. This causes a restriction of the money supply and thus deflation. Despite Bernanke and Paulson’s tough inflation talk over the past year, it is now clear by their actions that they fear an all out deflationary collapse.
Is the bailout going to be inflationary? Are they going to print their way out of this mess? Throw around enough cash to make devalued assets worth elevated prices by devaluing the currency. This option would punish those with savings to alleviate the pain felt by those with debt. I have a tough time believing bankers would shoot themselves, but anything is possible. Also it may be easy to inflate asset prices such as homes, but in a global economy, how can one inflate all salaries to pay for those assets? I don’t think you can.
Maybe Thomas Jefferson’s banking warning holds the answer?
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.
I’m still in the deflation camp, but as someone with zero debt and savings that could be my wishful thinking and bias. I’m going to keep reading and thinking about this. A possible deflationary collapse mixed with a stock market that put in shorting bans is a volatile recipe for a stock market crash.
After reading this book, I’m convinced that humans are programmed to not learn from history.
Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor covers financial speculation from Tulip Mania through the LTCM crisis of 1998. The book was published prior to the dot-com crash. Even though I found the early chapters a bit dry, the second half of the book provided an excellent overview to many of the financial disasters of the 20th century.
The most interesting chapter was Kamikaze Capitalism: The Japanese Bubble Economy of the 1980s. Listen to these characteristics of the Japanese economy at the end of the 1980s.
- Property values soared to records.
- Homes purchased with exotic loans (100 year mortgages).
- Low import prices kept inflation low.
- Rising asset prices caused an increase in spending (Wealth Effect).
- Cuts in income taxes.
- People borrowed against the equity of their homes.
- Consumer debt increased.
That list reads as if it were the United States from 2002-2007. After the bubble burst in Japan, they started a long period of deflation. I use the term deflation to mean a contraction of the money supply, not falling prices, which are a symptom.
What happened to Japan in 1990 looks like what is happening in America in 2008.
- Falling stock and real estate prices.
- Insolvent financial institutions.
- Banks with a growing amount of non-performing loans.
- Fear of risk and rush to Government Treasuries.
- Decreased consumer spending.
The Japanese spent over a decade attempting many failed policies to jump start the economy. Unfortunately, this list looks familiar as well.
- Aggressive cutting of interest rates. This had the effect of foreigners borrowing money in Japan and exporting it to other countries to seek higher returns.
- Central bankers turned a blind eye to banks that wouldn’t write down bad debt.
- Fiscal spending packages (checks in the mail).
Almost a decade after the bubble burst in Japan, Standard and Poors estimated that Japanese banks still had bad loans of $1.1 Trillion USD. Perhaps Ben Bernanke would be wise to read this chapter. In a global economy where capital flows to seek the highest returns in a transparent marketplace, Japan 1990s is much more relevant than the United States 1930s.