Tuesday, July 1, 2008


I don't think real estate and raw land would have been a safe hedge if you purchased 2, 3, 4 years ago. In fact, in some regions, you'd be grossly upside down.

Having said that, I called the real estate top 2 years ago, and called the severity of the subprime mortgage crisis last July as well as the second leg down on banks last month (ironically enough, in sports message boards). The take away message is the commodities listed (oil, gold, futures, etc.) are just assets, altho a different category of assets. Some were dormant for 20 years, and have recently come back with a vengeance. But you would have lost your ass several times over going long on them for all those years. They are just another class of assets, just like biotech stocks or mortgage-backed securities are financial assets. Some shine during certain periods of economic cycles, while others have their own value trajectories.

You're better off being a contrarian, buying assets that are beaten down and hence, grossly undervalued. Call me dumb, and that's okay, but I've never made any money following the crowd--in fact, I've always lost money going against my instincts. I will be a net buyer of certain downtrodden assets in the next couple years, as this downturn is going to last longer than most predict. We have time in this buyer's market to be choosy. But the bottom will be well-formed before the economic indicators pick up. That's my next call: when there's blood on the streets for the next 2 years, there will be huge buying opportunities. Just when the last bulls throw in the towel is when expectations will be lowest for even the most optimistic. That's when the secular low will be reached. The economy will eventually crawl up again, much like other recoveries, but entirely unique because inflationary pressures won't be dormant this time. In fact, that alone will temper the upside a bit.

I really do think future boom/bust cycles will be more pronounced, but that's not the worse part. What's worse is that the US is on its downslope in terms of being the top dog on the world stage. The 20th century experienced major dislocations as well, but America came back stronger than ever each time. These next recoveries won't be as crisp. We will have to accept that while we will still be one of the two biggest consumers of the world's goods, the adult table will now be more crowded. We will fall back into the pack along with China and a handful of powers.

One thing is for sure: we are in for a rough ride. I just find it counterproductive that the pundits and experts always want to look back retrospectively for a cure to prevent the next boom/bust cycle. But in doing so, they will introduce more legislation that merely adds to the cost of doing business. The laws to prevent fraud are in place--it's the enforcement that is lacking. Adding more legislation after the FSLIC S & L fiasco didn't prevent the current mortgage crisis. It just created more complexity and increased business costs. Just like Sarbanes/Oxley won't prevent the next stock market bubble. All S/O did was drive smaller companies out of business. They ended up too busy with compliance in lieu of concentrating on their core competence of running their businesses.

Bottom-line: we need to just accept that greed and fear have always, and will always drive market fluctuations. Irrational exuberance (coined by former Fed Chairman Greenspan) exists in every market boom, just like panic selling occurs with every market meltdown. Now, can measures be put in place to attenuate volatility? Perhaps, but the cure shouldn't be worse than the illness.

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