Emma’s Note: Our office reopens on Monday, so you can look forward to more new essays from Bill then.
In the meantime, we take a look at Bill’s “Trade of the Decade” strategy. In 2000, in his first trade of the decade, he urged readers to sell U.S. stocks and buy gold. Then, in 2010, he recommended buying Japanese stocks and selling Japanese bonds.
He’s working on his next trade of the decade, to be unveiled in the not-too-distant future. So we thought we’d take a look at how his first two trades have done…
Our “Trade of the Decade” is not an “investment.” It is a gamble… a speculation… a bet on long-term trends.
And it depends on two of the most reliable phenomena in the world of money – ignorance and oscillation.
As for ignorance, it hardly needs an introduction. We live with it. It is universal. It is ubiquitous and permanent, everywhere and always.
The biggest mistake an investor can make is to think he knows what’s coming down the pike. Then, he makes an “investment” based on an illusion, knowledge that doesn’t exist.
This causes him to buy things that are overpriced (he knows they are going up) and to stick with his positions long after he should have unloaded them (well… they ought to go up!).
The feds spend millions of dollars employing thousands of Ph.D. economists, statisticians, mathematicians, and analysts. Yet, not a single one of them can tell you what the price of oil will be tomorrow.
The future is a closed book. We are ignorant of it… and can only discover it one page at a time.
The shrewd investor admits that he doesn’t know what lies ahead… and rests his money decisions on the hard, unyielding rock of ignorance.
With this in mind, locking your money into a 10-year trade would appear to be spectacularly unwise.
And maybe it is. A 10-year time horizon compounds the negative consequences of being wrong over an entire decade.
On the other hand, it is designed to capture big moves, not small ones. And big moves, like grape vines, take time to mature.
Looking at an economy close up – like glancing at a plant – you can’t tell what is going on. It takes a full season to express itself; but then, plain as day, there is the fruit.
Betting on inflation (after the new, fake dollar was introduced in 1971) was a cinch.
Betting against inflation (after Paul Volcker stopped it in its tracks in 1980) was another sure winner.
In the 1990s, the stock market soared. And who couldn’t see that coming?
As early as 1987, then-Federal Reserve chair Alan Greenspan made it clear that the Fed was backstopping the stock market.
The economy was booming. And the miracle drug of the time, the internet, promised a whole new era of growth and prosperity.
Out of Whack
And now, we come to the 21st century.
In 1999, to the great annoyance of many of our dear readers, we warned that the dot-com bubble was going to pop. Then, in early 2000, we issued our first Trade of the Decade – Dump stocks, buy gold.
The trade was based on an ignorance of the future… but a knowledge of the past. Over time, markets oscillate from high to low, from blind optimism to stone-faced, wide-eyed gloom and doom.
In the entire history of the Dow, not once had stocks been so expensive, in terms of gold. Usually, it took about 10 ounces of gold to buy the 30 leading industrial Dow stocks. But by 1999, it had risen to over 40.
And while stocks were now trading at 11 times more than they did in 1980, gold was trading at almost three times less (the price had fallen from close to $700 to only $250).
Things were clearly out of whack. Neither gold nor the stock market were going away.
And while the two had drifted farther and farther apart over the previous years, that they might come back into whack (oscillation) over the next 10 years was a bet too good to pass up.
It turned out to be about the best bet you could have made. Stocks went into an almost immediate decline in 2000. Gold headed up.
By the end of that 10-year period, gold was the number one performer.
The gold side of the “trade” alone approximately quadrupled our money, while the stock side was almost exactly where it was 10 years before.
But then, the decade was over. We had to do something else. But what?
The pendulum had swung.
By this time, gold appeared to be fully priced. At the time, there was no reason to think it would register another spectacular move to the upside. (As it turned out, it continued rising for another couple of years.)
And stocks? This was just the beginning of the Fed’s big bailout for Wall Street. It was not the time to short the stock market.
We looked around. What had been going down for so long that it almost had to go up? And if it went up, what was on the other side of the see-saw? What would go down?
We had been following Japan for many years. Back in the late 1980s, we had predicted that the Japanese miracle economy would fail.
We were right. The bubble burst in 1989.
Then, the Japanese stock market fell down… and didn’t get back up.
But after 20 years, we figured it was time for a revival. Japanese companies were still going strong; it was a reasonable bet that their prices would move up sometime over the following 10 years.
On the other side of this trade, the obvious choice was Japanese bonds. The country had an exploding national debt… an aging population… and anticipated health and pension liabilities that would frighten an actuary.
Still, Japan’s bonds remained remarkably expensive, with the lowest yields in the world. That, too, we figured, was likely to change.
What happened? Well, not much.
Japanese stocks rallied over 150% from 2010 until the end of last year. Japanese bonds, the other side of the trade, actually rose 34%…
So we were right to be long Japanese stocks. But we missed the mark betting against Japanese bonds.
But we should mention one thing…
Japanese bonds would have fallen if the Bank of Japan hadn’t taken on phoney money policies… They printed about $4 trillion from 2010 to 2019.
“Don’t fight the Fed,” say the old-timers. We battled the Japanese Fed for 10 years… and it won!
No Sweat Returns
But if you had begun the 21st century with $100,000… and done nothing but make the two trades we recommended… you would now have $612,786…
We are perfectly happy with that return, by the way. It was achieved with very low risk and almost no sweat.
And it beats the returns on the Dow and the S&P 500, hands down…
From 2000 to 2019, $100,000 invested in the Dow would have turned into $251,000 (including dividends). And the same amount in the S&P 500 would have turned into $222,000.
But now, we have arrived at another decade.
We have a new president… a COVID-plagued economy… a $27 trillion government debt… and another $54 trillion in business and household debt.
What’s out of whack now? What’s the miracle that will fail?
Managing Editor’s Note: Bill will reveal his next Trade of the Decade to his Bonner-Denning Letter readers later this month. To be among the first to read all about it, you can secure your subscription here.
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