The Age of Deleveraging


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
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.

Four New Books That I Can’t Wait To Read


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
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
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
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
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.

Eye of the Hurricane


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.

  1. 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.
  2. The criminals must prosecuted. At the height of every bull market, there are individuals who 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.

Move Called Off – Staying in Queen Anne


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.

Sign of the Times – The Counter Offer


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.

  1. 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!
  2. 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!
  3. 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.


Photo by mehmetdeveci