How do you like that? Dow off 43 points on Friday. No bounce back from the big loss on Thursday. And gold keeps going up. It now seems to be aiming for $1,400 an ounce.
Remember the sentiment at the end of 2013? Gold was sure to go down. Everybody said so. Instead, gold and gold mining stocks have done quite well, thank you. The big gold ETF, GLD, is up over 14% so far in 2014. And the big gold miners ETF, GDX, is up 31%.
US stocks, meanwhile, are vulnerable. Want to make a simple trade? Sell US stocks; buy Russian stocks. Almost sure to pay off. Everybody loves the US, as evidenced by stock prices. Everybody hates Russia.
Carded in Aiken
We spent the weekend at a horse show. “Eventing” it is called, with three events – dressage, jumping and cross-country.
We were not so interested in the horses or the competitions as we were in the subculture and its people. Riders came from all up and down the East Coast… often with a trainer, several horses and grooms to take care of them.
The whole kit and caboodle comes down to South Carolina, Georgia or Florida for a few weeks in February and March. They rent a stable for the horses and rooms or apartments for themselves.
Last night, we went out to a pizza joint for dinner with a few riders, trainers and grooms. We ordered a glass of wine. Then the waitress floored us:
“Can I see your ID,” she asked.
“What?”
“I need to see your ID.”
“Are you serious?”
“Yes… the manager says we have to ask for IDs from everyone… so there aren’t any grey areas.”
“Grey areas? I’m clearly not in a grey area. When I was 21, the Lawrence Welk Show was still on the air… the US still had conscription… and we had our last real balanced federal budget.”
“What?”
“Oh, never mind.”
A Life in Words
Most of our career has been spent sitting in front of a typewriter. It seems like a wasted life in many ways. The outside world has so much more to offer. Sun, sea, mountains, green meadows… old, half-mad bums shuffling down St. Paul Street in our hometown of Baltimore. Bag ladies sitting all night at the bus stop in front of the Enoch Pratt public library.
We might have been an engineer, building bridges and skyscrapers… or a chef, making delicious canard à l’orange… or maybe even a decent brick-mason.
Who knows? Instead, we work with words. We bend them, twist them, and dragoon them into our service.
Once enlisted, the words are ready to do our bidding. Like callow youths from the farms and suburbs, the recruits don’t know which way to turn or what to do. But they stand at attention. They salute. They do as they are told. And then… later… they mutiny when our back is turned.
Did we tell you how we became a writer? In 1959, we were in Mrs. Marshall’s sixth-grade class at Owensville Elementary. We were given an assignment: to write a story.
We sat at our desk. Our chin up. Our head cocked to the left and our eyes drifting up to the ceiling. It was after a couple of minutes in this posture that Mrs. Marshall called us to account.
“Billy, what are you doing?”
“I’m thinking.”
“Don’t think, write.”
That’s what we’ve been doing ever since. We’ve been writing a daily e-letter since 1999… or was it 1998? Five days a week. On average, more than 1,000 words a day.
What’s that? Five thousand words a week… times 52 weeks (we rarely take a vacation) is 260,000 words a year times 14 years. We have sent out more than 3 million words.
Easier Than Working for a Living
Why do we write so much?
Because it’s easier than working for a living! And easier than thinking, too. In a business and in life, there’s a hierarchy. The easiest thing to do is something silly, like reading the paper or watching TV. Then there are meetings. Then writing. Above that is real problem solving.
For us, writing is a comfortable spot where we are in control. Time, characters, facts – they do as we command. The world is a complex, confusing and threatening place. It is a chaos of motion, ambiguity and nuance. It is as undisciplined as a Kiev mob… and as unpredictable as the stock market.
But with our words, we rush in… and impose order. We choose our targets. Our enemies. Our version of history and the facts.
Why satisfy ourselves with the dolts and dullards who populate real life? We invite the angels to join us… we sup with the gods… we beckon forth real heroes.
We don’t truck with anybody whose personality we have not shaped with our own words… nor do we have any use for a fact that we didn’t make up ourselves. As for the story, why not tell it the way we want?
At the keyboard, we are like a field marshal with his own army immortals. No fort is too strong to withstand our attack. No army is so well-captained that it can resist encirclement and annihilation. Before you know it we are taking prisoners and shooting them in the back of the head.
When we write, we make things turn out the way we want. That poor man wandering down the sidewalk with tattered, dirty pants and shuffling feet stuffed loosely into old running shoes, the heel sticking out the back… a black beard on a blackened face.
The bag lady, sitting under the bus stop roof… enormous sacks at her side… dirty quilts around her fat body… sleeping against the steel rail, sitting up.
He is a former stockbroker who couldn’t stop gambling on gold stocks.
She is a former ballet dancer who couldn’t stop eating.
And now – why not – we make them fall in love!
Regards,
Bill
Market Insight:
Your Best Defense Against the Next Crash
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Bill isn’t the only one worried about the vulnerability of US stocks right now.
Value investor and founder of the Baupost Group, Seth Klarman, has expressed similar concerns in his recent letter to shareholders. (If you’ve never heard of Klarman, that’s because he tends to shun the limelight. But the performance of the Baupost Group is legendary. It is one of the largest hedge funds in the world. And according to Bloomberg, it is ranked 4th in net gains since inception.)
Klarman has focused his attention on the big gap between recent US stock market gains and sluggish underlying corporate earnings:
No one can know what the future holds, but any year in which the S&P 500 jumps 32% and the NASDAQ Composite 40% while corporate earnings barely increase should be cause for concern, not further exuberance. It might not look like it now, but markets don‘t exist simply to enrich people.
And he’s warned that someday the current rally will mutate into big declines:
Someday, financial markets will again decline. Someday, rising stock and bond markets will no longer be government policy. Someday, QE will end and money won‘t be free. Someday, corporate failure will be permitted. Someday, the economy will turn down again, and someday, somewhere, somehow, investors will lose money and once again come to favor capital preservation over speculation. Someday, interest rates will be higher, bond prices lower, and the prospective return from owning fixed-income instruments will again be roughly commensurate with the risk.
The best protection against these inevitable declines is portfolio diversification.
Diversification is simple enough. The less that any single bad event of any kind can affect your portfolio, the more diversified you are.
That means investing in a range of asset classes – commodities, real estate, cash, tangible assets, etc. – outside of stocks. And also diversifying your stock market investments outside of the US.
This won’t make for exciting dinner-party conversation. But it will be your best defense in another market downdraft. Prepare now before it’s too late.
