Sunday, December 27, 2009

Investing Themes for the Next Decade: 2010 to 2020

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Investors make the most consistent money by following bigger trends and going long in uptrends or shorting into downtrends. Longer term trends are not unidirectional however, but subject to either sharp or intermediate term reversals. At those points, it is best to get out of the market until the uptrend or downtrend resumes. Of course all trends eventually come to an end and it is important to recognize this when it happens and to close out your positions. Failing to protect profits is perhaps the biggest mistake that investors make. While it is not possible to predict the future with complete accuracy, it is possible to make some useful projections that can be used as a general investing guide for the next decade.

The way to see into the future is to look into the past. Human behavior hasn't changed in the last many thousands of years and this is what is mostly responsible for repeating market boom and bust cycles. History has shown that government leaders in particular are prone to making the same monetary and fiscal errors over and over again. People who run governments have a tendency toward megalomania and a belief that things that happened consistently in the past (assuming that they are even aware of them) because of certain financial policy actions won't happen again in the present. They are invariably wrong. Central bankers can and do evidence this behavior to an extreme. They have repeatedly claimed that they have the ability to control the economy. The Credit Crisis makes it very clear that they do not - otherwise it would not have happened. Real world events have not shaken their faith in their own omnipotence however. Their arrogance combined with denial indicates that workable solutions to the Credit Crisis are many years off and only likely to take place once extreme conditions have been reached.

Repeating cycles and the historically oft repeated government responses to them provide us with a lot of information about what can happen in the markets during the next ten years. Just like everything else, the cycles will behave as they have in the past because the fundamental driving forces behind them are the same as they always have been. Before the decade even begins, we can clearly see three major factors that will impact the market until at least 2012. These are: the lag between monetary stimulus and inflation, the steep yield curve, and price cycles in certain commodities. These predict that a peak in the inflation rate, long-term interest rates and commodities prices is probable between December 2012 and July 2013. This will not be the ultimate peak however. There will be at least one additional peak that follows this one and two extra peaks are even more likely.

The exact high for commodity prices and interest rates of course can't be stated yet. It can be said however that they will be much higher than the beginning of the decade and be at levels that would currently be considered extremely high by most investors. Sharp price acceleration is likely to be evidenced in the last several weeks to few months of the move with as much as 20% to 25% gains for commodities such as gold and oil possible during this end phase. While an inflation investing strategy centered around precious metals, energy, agricultural commodities and shorting long-term bonds will be highly profitable up to early 2013, investors will then need to sell these holdings to protect their profits. Either switching to cash or engaging in a deflationary investing strategy will then become the best option, at least for a while.

This first inflation peak will end because it will become politically untenable for governments to allow it to go on. Investors should expect the typical government responses from the past. These include price and wage controls, currency intervention and cross border currency controls, import/export controls, rationing, punitive taxation policy on certain investments, changes in investing rules and regulations and either indirect or direct government forced dissolution of certain investment vehicles. As has happened in the past, these policy initiatives will work quite well - in creating shortages, black markets, general disrespect for the law, and in preventing the economy from fixing itself. Inflation will remain controlled for approximately 18 months at most. At that point, there will either be a de facto or de jure dissolution of many of the policy initiatives because of lack of support among businesses and the public. By 2015, inflation will on the rise again and investors will need to switch back to precious metals, energy, agricultural commodities and shorting long-term bonds.

Some ultimate resolution to rising prices will likely take place toward the end of the decade between the 2017 and 2019 time frame. Prices for most commodities will reach levels that would be considered unimaginable in 2009. U.S. interest rates will be somewhere well into the double digits (if not higher) and the U.S. dollar will have lost most of its value. By that point, the world financial system will have to be restructured. The dollar will have to be given some backing to regain credibility. There will probably only exist a narrow window of time for inflation investors to sell their holdings so that they keep most of their spectacular profits. They must then switch their investing strategies to approaches that work in a disinflationary or deflationary environment. For an update on how to do this, check back in 2020.

Disclosure: Long precious metals, agricultural commodities, short long-term bonds.

Next: Energy Investing Guide for 2010

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.