The Scarlet O'Hara syndrome seems to be overtaking many people these days concerning their investment portfolios. They all seem to be taking the "I'll just worry about that tomorrow" approach. How many people do you know who have said in recent months that they just didn't have the heart to open their statements when they arrived in the mail, so they just put them away unopened.
Since it is rapidly approaching the end of the year (time for 2003 predictions), I thought I might deviate from my history editorials and delve off into the future. This is pretty tricky ground for me as history is much safer to discuss.
The Fed is embarking on a mighty battle to combat the forces of deflation. Their efforts may result in a terrible inflation before they are finished. Unemployment up to 6% as per last week's report. Savings rates at or near zero. Those of us who have savings are slowly losing ground with inflation overtaking the low interest payments. Most of our manufacturing base is hurting due to foreign competition from low cost producers. In fact, much of our manufacturing base has moved overseas and has become low cost producers. China is emerging into an exporting giant and is sending goods to our shores by the boatload. Our balance of trade is in a terrible condition as a result of all this. We are making few items anymore, still consuming much and exporting little. All this should affect the U.S. dollar if it were not for the fact that it is the world reserve currency. The only thing keeping us afloat is that people from all over the world seems to keep reinvesting our exported U.S. dollars back into our financial system. With the stock markets trending down so hard (not counting our little recent bear market rally that seems to be running out of steam), foreigners are finding it harder and harder to profitably invest in our markets. With the latest interest cuts making U.S. government securities less and less attractive, you have to wonder if the investment funds from overseas will keep on coming. Not to mention the opening of the gold market in China and the Islamic dinar that could spread to the entire Muslim world. Looming war with Iraq with the possibility of it spilling over into other Muslim nations is particularly scary for myself as I have a son of military age (not to mention wars are economically devastating). And finally, the K-wave pointing to an economic winter. All of these items above just seem to point to trouble for the U.S. dollar.
Before you go and slit your wrists in a warm bath, there is some good news. Economic K-wave winters are tough to go through but they shake out the excessive debt and make us strong again. A decline in the U.S. dollar would make our exports more competitive and stimulate our economy. We need to pay down debt, and save more for capital investment. The only way we can compete with low cost labor is with expensive machinery that makes our high production overcome our higher labor costs. This can only be done with more capital investment. The party is over and it is time to get serious and get back to work. Not fun stuff, but we just need to spend less and start living within our means - no we need to start living below our means so we can save the difference. We need a simpler life with less material junk.
Now on to my 2003 future predictions
I believe our latest bear market rally is over or nearly so and the (stock) market should start back down before the end of the this year. I have personally invested in the Prudent Bear Fund as well as the Safe Harbor Fund and done very well over the past 18 months. I continue to believe that these funds will perform well as the markets continue to head down. I have also reduced my overexposure in mining stocks for now. Most have doubled or better and I have sold ½ of my positions. Nothing like playing with house money during uncertain times. I still hold 10% of my total portfolio in pm mining stocks.
I have followed the Elliot wave patterns for some time now and believe that while gold and silver are currently heading up they could possibly have one more down leg before building the biggest bull market in metals ever. While I am not sure how far it will drop I feel another down leg would not be out of the realm of possibility. The gold/silver ratio says that silver is a better buy these days. That along with the simple fact that we are running a silver supply deficit that will catch up with us sooner or later further states that silver is a better buy. Since silver too could have one more down leg before it heads up to who knows how high, I am recommending against trading silver futures unless you know what you are doing and use a stop loss to limit your downside risk. Gold and silver held in your possession are the safest moves to get you through either deflation or inflation. If PM prices do go down for the short run and then take off, do you really care since ultimately they are going way up. At present prices, especially for silver, the down side risk is minimal while the up side is almost unlimited. Do not miss the train and try and pick the bottom. Cost average in with small amounts starting now.
Finally, remember that in any market there is always value. Look for companies that have low debt, operate in a niche market, pay dividends and have low P/E ratios. Even if you can not find any that meet all the requirements start a watch list. When the market nears bottom there will be many great stocks selling at a terrific discount. Start picking out several to keep up with and try to pick an entry point. Preserve capital so you can buy the bargains at a later date. I am afraid that the later date will be beyond 2003, but keep the faith, things come in cycles and good stocks at good value will be available for those who have the means left to purchase them in the future.
My advise for 2003 is to pay down debt, save all you can, cut unnecessary expenditures, play the market down with BEARX or other short fund and cost average in on silver while it is still a bargain.
Next article, I will return safely to the well-charted waters of history.
Larry LaBorde, Silver Trading Company
10 Dec 2002