Investing…is dead! It died when markets became dominated by political rather than economic events. Investing principles that worked for most of the last 150 years are irrelevant in today’s politicized world. Investors, whether they know it or not, have been forced into a gigantic game of financial chicken….We are all forced to play this game whether we consider ourselves investors or not. [Let me explain.] Words: 848
So writes “Monty Pelerin” (www.economicnoise.com) in edited excerpts from his original article* entitled Playing Financial Chicken In Your Golden Years.
This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Pelerin goes on to say in further edited excerpts:
Most of what we learned about investing should be forgotten, at least until governments, society and markets return to honesty. If that occurs, it will be a multi-generational process, As a result, no one alive today should consider himself an investor.
- Today’s Investment Approach Must Change to Survive Tomorrow’s Major Economic Changes – Here’s How
- Be Careful! Former Investment “Rules” Nolonger Work – Here’s Why
Don’t confuse Warren Buffet and his ilk with investors. They may have been at one time, but are no longer. They are political operators who utilize politics and connections to their personal advantage. Unless you are very big, well-connected and willing to pay to play, you cannot play in their league. If you fit the aforementioned categories, you already have forgotten about investing and are playing a more sordid but profitable game.
What is the little guy to do?
[Option 1:] get out of markets.
[Option 2:] trade in a way that you protect yourself against the coming debacle.
Option #1: Getting out of markets probably is not a very good one and government dishonesty, particularly with respect to currency, is an important reason why. As governments continue to throw liquidity into the system, two effects occur:
- The money must go somewhere and will drive up prices.
- The value of the currency declines.
Recently, money has been going into financial assets. Government is driving up the price of bonds keeping interest rates down. That forces yield-starved investors further out the risk curve and into stocks. Financial assets have been affected more than consumer prices at this point (particularly if you believe government CPI statistics).
Not being in the stock market today subjects you to a potential double-whammy — the opportunity cost of missing a run-up in financial assets and the loss of purchasing power from holding cash or near-cash. If you believe that inflation will become a major issue (and it is hard not to when the Federal Reserve has quadrupled its balance sheet and continues its expansion), then holding cash is the equivalent to deciding to become poorer.
Investors, whether they know it or not, have been forced into a gigantic game of financial chicken….We are all forced to play this game whether we consider ourselves investors or not. Staying in markets is taking risk, but so too is leaving markets. If a person believes that liquidity will continue to drive up financial assets (until it no longer does) and drive down the purchasing power of money, then his biggest payoff is to remain in markets up to the point of collapse. Leaving too early is costly, and leaving too late could be even costlier.
No one should be forced to play this game. Retirees and near-retirees especially should be living off the income from a life of savings, not playing chicken to survive. Unfortunately, the government policy of financial repression (low interest rates) forces them into such a situation. The further policy of counterfeiting money makes the situation even more difficult. The fact that currency is being depreciated around the world has implications that should not be ignored. The risk of high inflation, perhaps hyperinflation, can destroy anyone on fixed income or who stands pat believing his savings are enough.
Option #2: Trading in a way that you protect yourself…should guide your course of action. The following comments provide an idea of how these considerations affect decisions:
- If you believe that future inflation will not be serious, then you should only be concerned about the opportunity cost of missing a rise in financial assets.
- If you could be assured that your funds would hold their purchasing power, you might be inclined to leave markets early, preserving your purchasing power rather than trying to grow it and risk major loss.
- If you believe that inflation will be severe, you should be inclined to stay in markets longer than otherwise.
- If you believe that markets have much further to rise as a result of liquidity, then the opportunity cost of getting out is greater and you should stay in longer.
- If you believe the market collapse will not be that severe (say 25 – 30%), you will stay in longer than if you expect a drop of 50+%.
- If you believe the market drop will be gradual rather than rapid, then you likely will stay in longer and truncate your positions when the pain becomes too great.
In an honest world (where currency had integrity), I would be out of markets but that is not the world we must deal with…The potential for an economic apocalypse has never seemed greater. There have already been two 50% drops in stock market averages in the first decade of this century.
Because I believe that [both] high inflation [option 1] and a market collapse [option 2] are real possibilities, I (and millions of others who believe similarly) am forced into playing the wildly dangerous game of financial chicken…
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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I read many hundreds of articles every week looking for writers who have an in-depth understanding of our economy and who are not reticent to tell it like it is. Monty Pelerin (a pseudonym) does just that week after week, year after year. This post includes introductory paragraphs and links to 25 of his most enlightening and current articles. Take a look. There are bound to be several that will grab your interest.
The world is hurdling toward what seems to be certain economic collapse so, if your expectations are similar to mine, then you should be exploring ways to prepare for something that eventually will become an economic dark age. Investment performance is always relevant and it has never been more important than in these difficult economic times – nor has it ever been more difficult. Markets have already changed and are getting worse…As the economy worsens, market movements [like the two 50% declines we have seen since 2000] are likely to become more pronounced [and, as such,] it behooves anyone with exposure to the stock market to understand what is happening and [take action to] protect themselves against further 50%, and possibly larger, downsides. [This article outlines how best to do just that.] Words: 1491; Charts: 2; Tables: 1
Investment “rules” that were relevant for a century are obsolete. They were based on a world where economies grew, people’s standard of living increased and outcomes tomorrow better than today. Arguably each of these conditions will not hold in the future but if they don’t, neither do the rules of thumb that guided investing last century. These guiding principles developed and worked in a world that that no longer exists but applying them in the future will result in devastating financial outcomes. [Let me explain.] Words: 1261
You need to stay in markets despite an impending economic collapse. [Really?! Yes, really.] Normally such an expectation would be addressed by getting out of the way of the oncoming disaster and taking ones chips off the table [but,] in this situation, there is no place to hide. Low-risk assets, like bonds and near-cash, produce little to no return…and the threat of rising interest rates and inflation make them dangerous. Higher risk assets are unavoidable, given current conditions. [Let me explain further.] Words: 830