This weekend, I thought about where I want to be invested over the next several years. I want to be building the foundation of my investment strategy now while we are in the midst of an extremely weak market. I thought long and hard about which types of sectors and companies will be winners three, five, and even ten years down the line so that I can start to take positions that reflect better times.
But I kept coming back to the same conclusion, the US equity market probably in not going anywhere but down over the next several years. Why am I so negative? We are in the midst of a secular bear market. These things can last twenty or more years. I think we started in 2000 with the popping of the tech bubble and will continue for another decade. The run up we saw from about 2003 up until 2007 was an illusion created by our government, temporary relief in an otherwise grim picture Here are the facts that I just cannot get past.
- American's are net debtors both as individuals and as a nation. This debt is going to come due, and it is going to come due faster than any of us would like. We have gone form creating net value and exporting it to other countries, to importing that value and sending away debt that we cannot really afford. That brings us to the next problem.
- Inflation. It is pernicious when it strikes, and it is looming around the corner. Anyway you slice it, inflation is almost inevitable. Foreign countries hold vast amounts of our currency. These same countries are growing at an alarming rate as they modernize. They will compete with us for the same resources causing inflation in commodity prices which is the basis for all goods. You couple this with really low interest rates that we have now, a result made by our government because they are printing money and you can see that there is no other logical outcome then we will have inflation.
- Boomers need to retire. This is demographics, and you cannot fight demographics. Most of their assets are tied up in real estate and the stock market. That means this very large and wealthy group will become net sellers. This will cause the price of all assets to drop as supply will greatly outweigh demand.
- Interest rates will rise. This will have negative effects on bond prices and the stock market. This is a direct result of the first point. At some point, other countries will get sick of our debt. However, we will have no choice but to keep borrowing. The only way to do this is to raise the interest rates we are willing to give on those bonds.
So given all of this, I am rethinking some of my long term investment strategies. I'm not so sure I will continue to short the market from here, I think we are going to see a short term rally very soon, but I will look to invest very differently in my long term holdings. Sure, I might buy some U.S. equities, but it will have to be a very solid company I am sure can reach international markets.
I will mainly be looking to short U.S. treasuries. Something that can be done very cheaply now as everyone is fleeing to safety. I will also look to a few more commodity plays. The price of real assets, especially those denominated in U.S. dollars, is likely to soar over the next few years. Luckily, these assets have sold off with the rest of the market. This should provide an excellent buying opportunity now, something we probably won't see again anytime soon.