Are You Really Prepared for Whats Coming?
I only wish to make a couple of points in this short commentary.
The debacle envisioned by Austrian economists is now becoming an undisputed reality. Don't be fooled by calls for Keynesianism. It might have worked when we were a creditor nation, but now that we have squandered most of our wealth (through Keynesian policies) and are the biggest debtor nation in the history of the world, it will fail miserably this time around...bond yields will soar and our currency will plummet.
Regarding asset allocation, this is tough because I am really lacking confidence in the system right now. P/E ratios for US stocks will likely be 50% lower (in the single digits) before we bottom. The period of contraction could be elongated. It likely will be due to errant public policy decisions.
Precious metals investments and owning shares of the cheapest sources (coal) are among the few groups that could gain in this environment. There is also additional money to be made on the downside in owning "short ETFs." I have very little visibility as to how long the downturn will last or how deep it will be. It could be a couple of years or it could be much longer. When the world economy does turnaround I expect that the Asian companies will emerge as the world's most prosperous and deliver the best investment returns.
Oscillations between inflationary and deflationary environments will continue to shred many portfolios which are not able to nimbly navigate between them. There will be wild fluctuations among investment sectors. Even owning my favored groups will undergo periods of sharp declines. It is therefore important to hold a sizable portion of your portfolio in cash.
Those who were reliant on asset appreciation to supplement their income to fund their lifestyle should prepare for major adjustments. You will see employees seeking more cash in their pay packages and less demand for equity and "participation in the upside." The deleveraging storm is upon us and the fallout will be far-reaching for the real economy and financial markets. You would be best served to position yourself by seeking the highest income paying job possible and significantly minimizing your expectations for gains in your various asset holdings.
Downsizing and lifestyle readjustments will mark era of deleveraging we are now entering. Better to get ahead of the trend now.