Prudent Investments for now?

[Anonymous]

Stephan, I agree with your analysis and investment picks. Only one nit — it won’t require billions to clean the mess up (the S&L fiasco cost us $200B, I vaguely remember), it will require trillions.

[PD]

How do you have your cash in Chinese RMB? Where do you have your accounts?

[ybc]

Stephen, impressive. What do you do at your day job? This is all a hobby?

[vcguy_10]

Stephan,
If you think the US will print copious amounts of money to avert a deep recession, that 50% of your portfolio in GRZZX and BEARX (both denominated in dollars) will be toast as the dollar devaluates! BTW, those two funds have expense ratios that are 10 times higher than those of low-cost funds such as those run by Vanguard. VERY expensive funds, and, even worse, denominated in dollars.

As for Au (gold, that is) your other 50%, it has more than doubled in five years. It may be argued that the same excess liquidity that doubled house prices in the US has caused the doubling in gold. Could there be a dotcom-like or RE-like bubble in gold? It’s now a bit over $600, but if you expect lots of money printing and dollar devaluation, and $1000 gold, then you should probably be upwards of 75% in gold.

Thanks for your posting. Whether one agrees with it or not, it is well thought out and thought provoking.

[ybc]

Stephan, Do you have a way to exchange your money back into dollars? Or are you waiting for the yuan to become a floating currency?

[vcguy_10]

ybc: the yuan doesn’t have to float for it to be convertible. You can convert it at the fixed exchange rate. The downside is the bid-ask spread in banks, which will eat a big chunk of your funds every time you get in and out. This spread may be higher than for european currencies.

Once you open a bank account in China, you can wire money to/from your US bank. China being a communist country, there may be added paperwork delaying the process.

[powayseller]

why do you like pho?

[ybc]

Stephan, you must know something that I don’t. As far as I know, once you converted your dollar into Yuan, you can’t just exchange it back to dollar (or any other currency). My parents couldn’t, and I couldn’t (when I travel to China, if I converted some dollars and keep my original receipt, then yes, I can convert back the left-over RMB). That’s why many people go to the black market. That’s why it’s a controlled currency. On my last trip, I did some American collegues favor to exchange dollar for their RMB because they lost their receipts. And I’m pretty sure that if the rule has changed, it’s a big news and I’d know it. It’s easy to exchange into RMB, but not that easy to get out (easier today if you have good connections in China, but not freely).

[SDbear]

“… with some money in gold is the preferred option now, due to the upcoming recession.”

Has’nt GOLD done bad during recessions? Only time GOLD goes up is during periods of moderate inflation and high inflation. So if you people are speculating a recession why be in GOLD? I would understand if you are planning for an eventuality of fed printing money like crazy to ward off the recession.

[Anonymous]

I like pho first off because it appears that it is being heavily accumulated — all the technicals look good. Secondly, I think that this is an underappreciated sector that will be bid up by everyone looking for the next thing once oil falls back. Lastly and most importantly, I believe that the long-term scarcity of potable worldwide will benefit all of the companies held in this fund. I think the downside is rather small because there is no hype in this sector yet.

[ybc]

The best case for gold is that the world needs an alternative reserve currency now that dollar may lose its value over time. US dollar is the dominant reserve currency for many countries, which gives it artificial support on top of what dollar should be worth based on fundmentals.

So gold should be thought as a hedge against the long-term devaluation of US dollar; and maybe also a hedge against increasing geopolitical risks in the world.

[powayseller]

I agree w/ you about water. That is the most precious commodity, and I’ve been looking for a good water play.

I hate owning dollars; it makes me very nervous. I really think this banking collapse and govt’ bailout will require so much printing of money, that the dollar will be seriously devalued. With a slowing economy, and the other central banks raising interest rates, the US Treasury will be less competitive. The 5% earned on US Treasuries doesn’t look so good when the ECB is paying 4%. Frankly, I see no hope for the dollar.

If the Fed lowers interest rates, inflation will really get going, and the Treasuries will sell off, as the main reason we’ve had buyers is that the US offers the highest interest rates. Due to our large debt, we’ve got to offer a higher interest rate than the ECB.

BTW, the piggington server problems are really starting to get annoying. Timing out, trouble saving comments due to some unknown character in the post, unable to access, etc. I hope Rich will be able to resolve this.

[SDbear]

“I really think this banking collapse and govt’ bailout will require so much printing of money, that the dollar will be seriously devalued.”

In that case all hard assets including Real estate and stocks will appreciate in dollar value.
Gold is a commodity and usually 60% of world buying in tonnage is bought by jewellers in India. But with the high prices last quater buying by this section has decreased by over 60% YOY. In dollar terms this might be around 30%. In addition to that some European central banks are expected to dump a significant portion of their annual sellable gold into the market before the sept 30 deadline. Gold market actually looks bleak for the next few weeks.
You should look at the gold market objectively like we are looking at the RE market. I’ll put some nos. off the cuff here, but it would be more or less close to the actual nos. Around 5% of annual gold (including mine production, scrap metal conversions and the central bank liquidations) is consumed for industrial applications, 20% for investments, 60% for the jewellery market in India. This no. used to be similar for both tonnage and dollar values until last year. Jewellery consumption in India is actually an indirect investment which will create huge divergence between tonnage and dollar value demand. So there will be some significant upward resistance in tonnage demand as the prices increase. Only 5% of gold will not have a direct effect on demand due to prices (although some indirect effect).
Gold is way more liquid than RE, so can go down much faster. If you are planning for an eventuality of Fed printing more money you are actually better off owning RE than Gold. Only problem with it is that most RE investments are leveraged and increases risk. Even if it is not highly leveraged it has to be a significantly big investment.

[ybc]

sdbear, I agree with your fundmantel analysis on gold. But if dollar gets devalued, foreign governments can’t own US real estate as part of their reserve. The world needs a reserve currency. Euro might take up some, but Gold is another natural choice. That’s the long-term case for Gold.

Right now I think that gold’s price is being helped by a lot of speculative interest. I read that gold index fund itself becomes the marginal demand that pushes up gold prices.

[Wiley]

I’m not too worried about jewelry demand as a fundamental driver of gold. I think investment demand, demand from China/India as they come on line, and the demand from the massive amounts of liquidity being injected by central banks all over the world of 5-8% yoy (including china).

I also like the water stocks. These companies are buying up the water infrastructure of these housing communities essentially becoming utillity companies. SJW is my favorite.

[Author]

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