This Market Is On Heroin
Beware of withdrawal symptoms when the fiscal stimulus is removed.
Without wanting to put too fine a point on it, Jim Slater has been around the block a few times. Aged 81 yet still very active in the markets, this legendary British investor and financier has earned the right to call it as he sees it. . .
Slater sees the economy, particularly in the US, in a very bad place -- but the market as being kept drugged and oblivious to the fact by the authorities, who are using massive amounts of monetary easing to make sure it stays that way. . .
Slater says it's like there are two parallel universes, running side by side. He continues:
"The first one is what might be called 'the dark room'. We all know the problems. There's massive unemployment. Deleveraging at the banks is continuing. There's overcapacity. The banks aren't lending. There's underfunded pension schemes. Sovereign debt is in doubt. The American states are in deficit. And there's a bleak potential deflationary outlook."
This is the outlook that launched 1,000 bearish bloggers, and Slater quotes freely from them. In this world view, the US dollar -- the world's reserve currency and the anchor of the world's monetary system -- will inevitably collapse.
Why? Because the US is "beyond the point of no return", with embedded Federal government debt of $13 trillion, and unfunded future liabilities in Medicare, social security and similar adding up to another $50 trillion. There's a current budget deficit of over 10% of GDP, and the majority of the 50 states in the Union are near-bankrupt.
"So it's fair to say the situation isn't too good," remarks Slater dryly. "And that's the dark room."
Step in the light
Before you sell all your possessions and flee to the hills, remember there are two games in town.
The other room, the 'light room', Slater also calls 'the QE room'. Thanks to quantitative easing, he says, "it's as if everyone is on heroin."
"It's a very good analogy, because if someone is a heroin addict, it's dangerous as I understand it to withdraw the heroin too quickly. So you have to keep feeding them a little bit, and you hope to gradually unhook them.
"And that's the position that we're all in. We're used to having plenty of money sloshing around, and they are therefore all talking about -- both the Bank of England and the Fed -- about increasing the money supply. That underpins the downside -- by printing money."
Besides making cash a terrible investment, this money printing leads to the risk -- which Slater considers "substantial" -- of eventual inflation, and perhaps even hyper-inflation.
"Especially with all these doubts about currencies," he adds.
Slater's investment slate
The best we can do when faced with these two different situations says Slater is to be prepared for both the dark room and for the light room. Here's his proposed asset allocation:
20-25% in cash -- "It might be very useful if there's a real fallout."
30% in "well-chosen" small cap shares.
30% in gold shares.
5-10% in oil.
5-10% in agriculture.
http://www.fool.co.uk/news/investing/20 ... eroin.aspx
Interesting allocation. I've been keeping a larger share in cash than was historically recommended, due to fears in the last few years. But it's interesting that he goes a step further and puts money in gold, oil and agriculture. Hmmm. Maybe something to think about, though alcohol, tobacco and junk food are probably fairly safe bets too.