Risk/Reward Vol. 161
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Bubble, Pop, Electric
Take it to the back seat
Run it like a track meet."---lyrics from "Bubble, Pop, Electric" by Gwen Stefani
"And I feel/Like I've been here before
Feel /Like I've been here before "---lyrics from "Deja Vu" by Crosby Stills & Nash
"This opportunity comes once in a lifetime, yo
You better lose yourself in the music, the moment
You own it, You better never let it go.'---lyrics from "Lose Yourself" by Eminem
In June, 2005, I sat on the board of a company that derived a significant percentage of its revenues and profits from the real estate/construction sector of the economy. And, man, real estate back then was red hot--"on a run like a track meet." But by that time, those who cared to look could see that the sector was a "Bubble" that could "Pop": a bubble inflated and perpetuated by the Federal Reserve's (then chaired by Alan Greenspan) low interest rate policy. Recognition of the bubble notwithstanding, the board faced a quandary. Real estate was still such a profitable part of the business, no rational person could simply "take it to the back seat." As a consequence, the board tasked a bright business development person with developing a real estate risk assessment tool we called the "RE Risk Report". The board received updated reports frequently, and the risk of real estate was discussed extensively at each of our monthly meetings. For us, the good times in real estate lasted well into 2006 at which time we determine that it was time to reduce exposure to that sector. Thank God we did.
To repeat, we on the board recognized the real estate bubble in June, 2005. This is what Ben Bernanke said in October, 2005 as then reported by the Washington Post:
"Ben Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next Chairman of the Federal Reserve."
"And I feel like I've been here before/Like I've been here before." These days, Chairman Bernanke proclaims with equal confidence that quantitative easing (QE3) is not creating an asset "bubble that is about to burst". Yesterday (in what can only be described as the kiss of death) Alan Greenspan concurred with Bernanke in an interview on CNBC. Yet, those who care to look (e.g. Druckenmiller, Dalio and this week Alan Blinder) predict that it is just a matter of time before the QE3-induced bond and stock market bubbles burst. We are in the "moment", fellow investors, facing a quandary just like my fellow board members did back in 2005. It would have been folly for that company to exit real estate in 2005 just as it would be folly for us to exit the stock market today. If one needs a reminder of this, please note that the Dow Jones Industrial Average (DJIA) continued its impressive climb this week, closing up 117 points. But what risk assessment tools can we investors employ? When will it be time for us to exit?
If anyone can answer those two questions, definitively, please send him/her my way. For "the moment", in regard the stock market "I own it." That is not to say, that "I will never let it go." I will not "lose myself in the music" that Benanke is playing. As Stanley Druckenmiller said last week, the asset bubble will end badly---we just don't know when. Bubbles always do. Take a look at the five year chart back to 2008. If one had exited down 8-10% from the Lehman Brother's fiasco that began September 15, 2008 and re-entered half way up the spike that occurred during any of the several days following the March 9, 2009 confirmed bottom, one would have enjoyed an investment "opportunity that comes once in a lifetime." Except, I don't believe it was a "once in a lifetime." I believe we will see it again in the not too distant future. This time I will be ready "yo". I will short Treasury bonds once that market collapses (and that will occur no later than the end of QE3--if it ever ends). I will exit any stock if it tumbles below my 8% loss limit, and I will short the DJIA and the S&P if they collapse as precipitously as they did in 2008.
You and I cannot impact monetary policy. But we can observe the obvious: QE3 and similar easy money policies adopted by central banks throughout the world are inflating an asset bubble and are creating a circumstance that likely will result in a crash. Why not enthusiastically embrace the obvious and prosper if and when that crash occurs? After all, the magnificent stock market run that we have experienced since 2009 was made possible only by the crash of 2007-2008. As those noted investment advisors, Crosby, Stills & Nash preach:
"The darkest hour/Is always just before the dawn.
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