In peace, prepare for wars. In calm, prepare for storms.

In 1994, when the world was awash in optimism and military funding was in decline, I read a small book, “The Transformation of War”, and its relatively radical predictions. At the time I wrote a newsletter to my investment advising clients suggesting that the “peace dividend” and the “kinder, gentler world” might be illusory. I had no idea how right Martin Van Creveld would be. Now I’m watching the current expansion of China and the rise of even more social anger, and I’m thinking that we need to be emotionally and financially prepared for war in the coming decades, especially since military spending is again so reduced. Historically, we have wars when we are weakest. What does this mean to our portfolios? Stay flexible, stay liquid, keep at least part of our money overseas. At the moment I’m on a campaign to diversify and streamline our portfolios. If there is no storm and there is no war, we’ll thrive even more fully. Here’s hoping and praying.

The “sell it all” decision is most often regretted.

We’ve had all-time highs in the stock markets in recent days. Valuations are stretched. Some sort of correction is more likely. But we can’t just sell out of the stock market and wait for better days, because markets often ignore valuations in the short run. Instead it’s better to rebalance and diversify, and BUY when markets fall.

Check out the wonderful graph at the bottom of the article here.

We are in the Mother Of All Bubbles in the bond markets…

We appear to be in the Mother Of All Bubbles in the bond markets. The fear-mongering of negative interest rates created by central banks is having genuine and unforeseen consequences. We genuinely haven’t been here before. This means…well, we don’t really know what it means. Except that bond prices are sky-high and bond interest rates are historically low.

Our investment response is that we aren’t trying to guess interest rates in the short run. We own some short-term funds and some funds with longer durations. But we are also watching carefully for an interest rate spike!

At this point all our asset allocation and hybrid funds are looking great too. Yes, they are boring. In a crisis they do quite well. When any interest rate rise occurs we’ll be watching these funds as well.

Embrace the MOAB!  DO NOT buy long term bonds! 🙂

Read this fascinating article about how people in Europe and Asia are coping with NEGATIVE interest rates! It’s like cats fly  or something! 

Is inflation the only way out?

At the end of a busy day of study and action, I’m looking at overall debt loads and interest rates. I’m wondering if, perhaps, the US government might seek to “accidentally” create runaway inflation for a short period to reduce the real cost of their soaring debt load. Otherwise, when interest rates go up, it’s going to be very difficult to repay. It worked for Germany in the 1920’s. No, wait, it didn’t work, did it? Still, it will be tempting when the bills come due.

Explore German hyper-inflation here.

Out of energy, into financial stocks.

We have largely exited our energy holdings. Most of these were profitable. We have cut our gold exposure in half after a very successful run. Our overall holdings in technology and health care remain in place. Now we are newly invested in bank stocks, both foreign and domestic. The challenge of financial stocks currently is that they are a very uncertain and high-risk position, dependent upon both interest rates rising and economies not stalling. We can’t really guess what will happen. For example European bank stocks…of which we own a dollop…were hammered today with bad Euro-economic news (Is there any other kind?) I’m thinking that patience and humility may help us produce outsized gains in this unloved, ignored sector. Meanwhile billionaire bond trader Jeff Gundlach says sell everything, even the kids. I’m inclined to keep the kids. Stay patient.

Read this article simply to see what billionaires think is happening…and it’s not pretty. 

Singapore’s Sovereign Fund is expecting what the bond markets are already predicting

That would be at least a decade of slow growth. The article is attached. As I read this, I’m struck by how fortunate we are that we didn’t go to cash back when it seemed that cash was best. I’m interpreting this article as a prediction (and you know how well those work) that index funds won’t uniformly perform optimally. (That’s investment-speak for “They might lag.”). There will still be very attractive sectors, if we have the wisdom to see them and the courage to invest in them.

Read the article here.

Taking profits in energy

Today we exited our relatively high-risk energy holdings, after a very profitable short term run. I tried to hold on to get as many clients as possible long term rather than short term capital gains. However since we’ve been going sideways for a couple of weeks I thought it would be wise to take gather our profits and depart. The easy money from the days of grotesque overvaluation last year appears to have been made. Also I’m hoping that our diversified value stock mutual funds have a toehold in energy. Now we’re on to other bargains.
 
In the bigger picture, we could see either the stock or the bond markets move dramatically based on news. Both are overvalued. Our energy adventure was a bit of sideshow, compared to the bigger challenges of asset allocation and diversification. That’s where our greater attention must focus. Go slow and stay cautious.