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A Better Way…

Kirk SpanoAccording to Warren Buffett, the top 2 investing rules are…

Rule No. 1: Never lose money. 

Rule No. 2: Never forget rule No. 1.  

What we can take from those rules is that the most important aspect of financial planning is having an investment approach that protects you from large losses and still gives you an opportunity to make money over the long-term. Very few people actually have that.

My name is Kirk Spano and I founded Bluemound Asset Management, LLC in 2010 as a response to what I saw the financial industry doing to people. I am widely published, including on MarketWatch.com of the Wall Street Journal network. I have also appeared on television and radio. Take some time to learn for yourself how I have helped people a lot like you. 

What I can tell you in short is this: if the way you have been invested has subjected you to large risks and not given you the returns you hoped for — there is a better way.

MarketWatch  Fox Business  WisBusiness.com  Seeking Alpha

Inflation v Deflation, the “D” Word and Low Hanging Fruit

Special Letter: September 2009 

Inflation v Deflation, the “DWord and Low Hanging Fruit

Much has been discussed, pontificated on and blogged about regarding deflation and inflation over the past year, so I thought I would join in.  The current prevailing wisdom is that we are on the cusp of global inflation.  To be especially hard hit are nations that have printed money and gone deeply into debt to escape the financial crisis, such as the United States.  While I agree that ultimately there will be inflation, I believe there are short term factors which will delay its arrival and a major mitigating factor which might limit inflation in the long run as well.

It was said by Milton Friedman and Anna Schwartz that “inflation is always and everywhere a monetary phenomenon.”  Whether or not that is actually completely true in real time has come into some doubt, though it is clearly largely true.  What most people believe is that rising prices indicate inflation.  For an economist, more money per capita in the global financial system or any national financial system is inflation, or at least portends future inflation.  In short, once money creation exceeds the population growth rate, then there is monetary inflation, or money is worth less per unit, which is to say, it will buy less goods or services than before. 

 

 

 

 

What is going on right now does not seem to be inflationary to people because they might not see prices on many goods going up.  However, with the printing of money, the value of that money does in fact drop, hence inflation.  Virtually every measure of money creation by the U.S. government is reaching all time highs right now (see charts above) as the government replaces vaporized money from the financial crisis by creating money today and issuing debt.  In the past few weeks it appears the Fed and Treasury have tapped the breaks, but this does not mean that it will not accelerate again.  Also, it certainly does not mean the government can avoid creating trillions in new money when the Chinese and other creditors start calling our debts due in several years, nor does it mean the government will not increase money supply at some future date, say coinciding with an election cycle to make things look better than maybe they are at that time.

At the moment, because the supply for goods and services does exceed demand in many markets, price increases are being pushed off.  We in the United States also still have a massive real estate overhang and dangerously high unemployment creating downward price pressure on end markets.  Specifically to note is that commercial real estate has two cycles of mortgage resets coming on a glut of five and ten year notes issued from about 2005 to 2007.  Because most banks have tightened lending standards and many buildings are more vacant than usual (drive down a commercial street and count the “For Lease” signs) many buildings will not get refinanced.  This means we will see commercial real estate prices start to drop far more noticeably soon as investors and banks unload properties.  The second batch of resets will occur from 2015 to 2017 which means that any recovery might be mooted.  Residential real estate also has a massive number of resets through 2012 (see chart below), which I believe could result in another 2030% drop in many home prices.  That massive deflation of real asset prices, along with high unemployment will likely create the illusion short run that there is no inflation because prices may not reflect it just yet.  In effect, we will have “invisible inflation” that will jump out of the shadows at us eventually.

 

Further, as displacements occur in the economy– both domestic and foriegn, or the reality of the recovery falls short of expectations for a recovery– which I believe we will fall short of, or foriegn and domestic financial markets experience turbulence due to effects of the financial collapse, there will be occurrences where the dollar becomes strong short term due to the so-called “flight to safety” trade.  In these circumstances, valuable assets can become cheap and the dollar can temporarily buy more, a nice combination for those with cash. 

For investors who have been able to accumulate cash, or at least hold very conservative asset allocations on existing investment accounts, there could be some very interesting and good investment opportunities to buy assets that do well under inflationary environments for the next few years, but are priced low short run due to a lack of buyers.  As global demand increases in a few years, and the newly minted money becomes circulated– rather than being largely dormant as it currently is, and markets anticipate that money, we will see some inflation emerge. 

Two things to be aware of long term are these offsetting facts.  The U.S. has issued a lot of debt– which will increase money supply in the future– to China, other Asian and Middle Eastern nations.  However, as emerging market economies expand over the next decade, their need for tradable money will increase.  These economies will generally use either U.S. dollars, the Euro or some basket of currencies, i.e. International Monetary Fund Special Drawing Rights, for trade as their currencies will likely not be stable or liquid enough to buy some goods.  Thus, at least to some extent, the increasing supply of money and an increasing demand for money could somewhat offset.  So while I expect inflation, I do not expect hyper-inflation. 

It is also important to note that by borrowing money from China, the largest fast growing economy in the world, the United States has in effect made certain that the dollar will remain one of the world’s reserve currencies, if not the reserve currency.  Although this seems counterintuitive to some, there is very little reason to believe that China would want the U.S. currency to depreciate much and be removed from its perch despite rhetoric to the contrary, thus there will likely be no currency war. 

It is very important to understand what the reserve currencies of the world are, because the reserve currency or reserve currencies receive the free ride of the planet.  That is, if a nation’s currency is the reserve currency, in essence exerting some form of monopoly pricing pressure on its money, then, it will artificially be priced higher than it is actually worth based on that nation’s balance sheet– mitigating inflationary forces, for example, for a nation carrying a large debt.  Because I believe we now know that the dollar will remain at least “a” reserve currency for decades (the bonds sold to China mature in ten to thirty years and likely will be refinanced at some point) and China is growing very fast, it is very possible that the U.S. Dollar and Chinese Yuan somehow share reserve currency status in the future.

I believe we will see the next commodity scarcities in agriculture, as arable land, irrigation and fertilizer are moving to be in shorter supply while demand for food increases, and natural gas which due to being in a current glut, with accompanying low prices, is causing producers to not engage in new drilling while depleting existing wells.  Oil could also go through rapid price movements; I believe likely downward in the near future due to a short term glut, but gradually up as the cost to extract oil from newer reserves is rising.  I am not a long term believer in gold as it just does not have the uses that other commodities have, though that is not to say it won’t trade up on emotions and specualtion.

The Depression

The same TV talking heads who had a hard time calling a recession a recession until there were two quarters of negative GDP are now having a hard time calling what is going on economically a depression, even though we have now had four quarters of negative GDP.  Folks, it’s a depression.

Read this: http://www.shadowstats.com/article/depression-special-report

Scary stuff.  That article should help explain why after getting more aggressive for a few months this spring, I am back to being pretty hunkered down.  It should also verify that it took quite a long time to break the system as bad as we have, and will take a long time to fix completely.

Graciously, this storm too shall pass, and if we can avoid pouring gasoline on any fires, we could in effect be trading a rough twenty years or so (2000-?) for sixty or more years of prosperity, and potentially peace, if nations around the world can grow enough to want to avoid fights.

As I believe that the recent market run-ups have largely been of an emotional rebound nature and we are now once again slightly overvalued in many spaces, our short term investment strategy (for investment advisory accounts, others please call to discuss rebalancing) is to be on the far conservative edge of our asset allocations again.  If the markets continue to trend up short term, I believe we can make that money back by saving our assets on any subsequent drops in the markets.  In the intermediate term, I am looking for opportunities to find low hanging fruit and maintain lower than industry norm risk by investing in only exceptional values, which are in short supply right now.  Ultimately, I expect to find the best opportunities overseas.

More next month.  Please make sure to attend our investor’s breakfast in a few weeks.

Cordially,

Kirk Spano

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Tactical Asset Allocation

The best offense is a great defense.

Tactical Asset Allocation

Are you utilizing the appropriate defensive strategies for your portfolio?

Today’s economic and financial climate are extremely dangerous and could lead to a large, fast drop in asset prices. Do you have a strategy to get out of the way quickly should that happen? 

“Set it and forget it” methods of investing like mutual funds, do not usually work. So-called “guaranteed” products, like annuities, are expensive, often lock people into low returns forever and aren’t always as safe as advertised. 

Tactical Asset Allocation using some of America’s top financial minds can offer protection that sales driven investment approaches don’t. Call today to find out how a tactical investment strategy can protect your retirement nest-egg and secure your lifestyle.

Punch Card Stocks

Buffett MungerWarren Buffett has famously said that investing in only twenty stocks, represented by a punch card, could improve your financial welfare. That is the impetus behind my “Punch Card” Stock Portfolio. These are the roughly twenty companies that I believe belong in the long-term growth portion of your portfolio and mine. 

Read my columns on MarketWatch, on my websites and elsewhere to see how a slow-handed and well thought out approach to stock investing can control risk and be profitable long-term. Learn more here.

 

Time for a Change

Do you want greater peace, security and freedom to pursue the lifestyle and legacy you really desire?

Do you want to avoid large losses in the next financial crash?

Do you want to take advantage of market opportunities when available?

Are you willing to take a few steps to secure your best future?

If so, call me today: 855445-4321

Monthly Investor Call

The second Saturday of each month at 9am.

Open to the public. My next call is on:

Saturday, August 9th, 2014 at 9:00AM (CDT

To join, follow this link or just call 262822-3677. No PIN needed.

Submit questions by email

Retirement Catch-up Plan

Behind on your retirement saving? Call us today to get back on track with a unique barbell approach to retirement saving.

Kirk’s Recent Quarterly Letters

Freedom to Unite and Invest in Tomorrow

UpWhen I was a kid I dreamed about being an astronaut, a baseball player, a rock star and the President. As I hit my teen years and I hadn’t done much musically, I dropped the Mick Jagger aspirations and focused on baseball. By senior year of high school I knew that baseball was fun, but that I wasn’t an elite player so I had to drop the Robin Yount dream too. 

When I got to college, I focused on having a good time and taking courses that might help me when I grew up. For awhile I thought I’d be a lawyer, but a great uncle gave me some guidance and I decided against that career path. I graduated from college with a degree in economics and a second in political science with a law certificate tossed in. That’s not what I dreamed about as a kid, but it has proven to be a good direction for me. I got there by taking one step at a time and just not stopping.

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The Great Retrenching Continues…

Total DebtIn September of 2008 I had coffee with a group of executives from local manufacturers, it was just after the financial crash had started. One company president in the group — a particularly political sort — asked me how long the economic slowdown would last? I said “until the middle of the next decade sometime.” He laughed at me.

Fast forward to today. What we know now is that the economy still has not recovered in real terms and that it will be a few more years until it does. The United States is just about in the middle of a demographic depression that can not be fixed with legislation or easy money. We must wait until household formation and spending by the very large millennial/ echo boom generation ramps up. Last year was the first year since 2008 that we saw an uptick in the birth rate, so that is a positive, however, it is only a baby step.

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2014 Another Crossroads

S&P 5002013 proved to be a profitable year for investors. The S&P 500 rose 29% and set new record highs. Global balanced indexes, more representative of most people’s portfolios, also did very well by returning about 20% despite a tough year in China which lost 9%.

The high return of the stock market had an expected effect on people. Many investors started to chase returns and look to be more aggressive after years of being risk averse. The result was that 2013 saw the most money from retail investors flow into stocks since 2000. I discussed this in a November article on MarketWatch titled “How Bad Will New Investors Get Hit.”   

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Volatility, Opportunity and the Next Crisis

Secular Bulls and BearsOver the past several years, I have discussed the monumental demographic changes that not only America is dealing with, but also that Europe, China and Japan are dealing with. The cumulative impact of national and personal debts, de-leveraging from the bubbles of the 2000s and the four largest economies in the world having aging populations has created global demand destruction that is not likely to end soon.  

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