We can all opine and kvetch about what the U.S. government should and shouldn't do about the current situation. And it makes a lot of sense to be aware of what the situation is, and where it's likely to lead. Not, however, because we can change things, or even so we can profit from them. But so we're not adversely affected by them.
My own views on what are good things to be in – and not to be in – aren't really affected much by the impending war. The reasons for that are twofold. First, markets have a life of their own. I try to make decisions based more on what I think the reality of the markets are than my crystal ball view of the world at large. Second, what's going on now is pretty much in alignment with my "big picture" anyway, so I see this war as reinforcing and accelerating, not changing, trends already well under way.
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So here's the bottom line:
- The U.S. Dollar – It's grossly overpriced, and in the early stages of a major bear market. The main risk in betting against the dollar is a severe deflation (see International Speculator). The Forever War can only be bad for the dollar – inflation of the dollar is a major source of revenue for the government. Action: Keep your liquid assets in currencies other than the dollar.
- Stocks – Even though stocks peaked in 1998, and have been in a nasty bear market since January of 2000, they've got a long way to fall. The DJIA is yielding 2.5 percent – bear markets typically don't bottom until that number is about 6 percent. At one point in 1932, the DJIA yielded 12 percent. With recent mandated accounting changes – and well-known accounting shenanigans which are just starting to come out – dividends are a much better indicator of value than earnings or book value, although those barometers are still off the scale.
Most people are holding on to stocks in a hope of getting out even – they'll be disappointed, since we're still only in the second stage (concern), and nowhere near the third stage (panic) of what may be the bear market of the century. The Forever War will draw capital out of productive activities in the broad economy, and either destroy it, or misallocate among companies it deals with. Action: Get out of stocks. Or, at a minimum, put in a trailing stop-loss 10 percent below the market.
- Bonds – These have been strong, and actually an excellent speculation in recent years. Now yielding 4.7 percent, Treasuries in particular, and bonds in general, could go higher. But I don't want any part of them. Bonds are a triple threat to capital: Interest rates, the dollars bonds are denominated in, and the creditworthiness of their issuers are huge negative factors. The Forever War will necessarily result in much more government borrowing to finance it. Action: Get out of bonds – certainly those less than AAA, and with maturities greater than five years.
- Real Estate – Prices have been soaring in most parts of the country, driven in part by today's extraordinarily low interest rates, and often "less-than-no-money-down" financing. Property has been very good to me, but it's built on a pyramid of debt, and in the midst of a mini-mania. I like to buy property at times when, and in places where it's distressed – the U.S., today, isn't one of them. The Forever War will tend to make property in the U.S. less desirable. Action: Be a seller, not a buyer. Take advantage of today's low rates to borrow – but only if you can put the cash in a safe place.
- Commodities – Everything in the markets is cyclical. And that absolutely includes commodities. I don't encourage people to trade commodities – it's a game for pros. But, for what it's worth, raw materials are historically very cheap, they're something of an alternative to the dollar, stocks, bonds and real estate, and you should be aware of these facts. The Forever War will tend to both increase and disrupt production of commodities. Action: Play prices from the long side, everything else being equal.
- Precious Metals – This is where I really hang my hat. I don't want to rehash the case again, but in a world where the herd doesn't even know these metals exist, and the few that do are either ideologically against them, or hold them as a laughing stock, one needs intellectual and (mainly) psychological reinforcement. These are the only financial assets that aren't simultaneously someone else's liability. The Forever War will make people more inclined to hold metals over paper. Action: Consistently accumulate the metals, and pay attention to the mining stocks.
- International Property – Most North Americans have narrow geographical horizons, as well as little historical perspective. A bit of well chosen property outside of your government's bailiwick offers a unique combination of safety, pleasure and potential profit – as well as providing both political diversification and diversification outside the dollar. There are places that won't suffer, or will even benefit to some degree, from the Forever War. Action: Read over archived copies of International Speculator if you're wondering which locales might make sense.