Well, that was it for 2009. Whew!
Another great year for gold. But it wasn’t a bad year for stocks either. The NASDAQ rose 45%. The Dow went up about 20%.
As we guessed back at the beginning of the year, stocks bounced. What we didn’t guess was that they would bounce so much for so long. All over the world, stocks went up…and continued to go up. A bounce is inevitable, following a stock market drop. And it’s impossible to say how big a bounce it will be…or how long it will go on.
But a kiss is still a kiss…and a bounce is still a bounce. No kiss lasts forever. Neither does a bounce. Looking ahead, we have to anticipate that it will come to an end…probably in 2010.
If you’ve profited from the 2009 run up in stocks…bravo! Now, sell them… Yes, the bounce could continue. But it’s not worth the risk.
And how ’bout the gold market! Gold has risen every year of the decade. It was the surest, safest place for you money – by far.
Does that mean gold will go up in 2009? Does that mean we will stick with our ‘Trade of the Decade’ for another ten years? Not to brag, but our trade was a big success. Even we were surprised by how well it did.
As long-suffering Daily Reckoning readers will recall, we announced our ‘Trade of the Decade’ in 2000: Sell Stocks; buy gold.
“It turned out to be a good plan,” observes colleague, Merryn Sommerset, in a recent Financial Times story. “In 2000, you could buy an ounce of gold for $280 (the average price over the year). Now, it will cost you about $1,100. At the time, Bonner saw what most others did not. He saw the US not as an economy carefully and cleverly managed by then Federal Reserve chairman Alan Greenspan and his passion for low interest rates, but as a massive credit bubble waiting to burst.
“He also saw the massive and growing national debt, the trade and budget deficits, and fast growth in the money supply as factors that would naturally debase the dollar over the long term. He also saw the credit bubble as global rather than peculiar to America. So it made sense to him to hold the only non-paper currency there is – gold.”
So what’s next? What’s the trade of the coming decade? Well, your editor has decided not to double-down on the identical trade. Gold will remain in our core holdings, but not in our Trade of the Decade for the next 10 years. Why? Because we think the US economy is going the way of Japan.
Japan went into a slump in 1990. It has come out…and gone back in…and come out again…and gone back in again. In terms of the amount of wealth destroyed – at least, on paper – it was the worst disaster in human history. The value of real estate went down 87% in some cities. Stocks fell from a high of 39,000 on the Nikkei Dow down to the 7,000 range in 2009…their lowest point in 27 years.
Why such a bad performance? As we keep saying, if you really want to make a mess of things you need taxpayer support. The Japanese put more taxpayer money into the effort to prevent the correction than any nation theretofore ever had. The result: the correction was stalled, delayed, and stretched out over more than two decades.
And now, US economists are looking at Japan…not with alarm, but with admiration. They are beginning to believe that the Japanese model is the way to go…because it prevented widespread unemployment and a deeper slump.
Here’s our best guess:
Now that the US economy is caught in the same sort of de-leveraging process that gripped Japan, the same sort of “remedies” will inevitably be employed…leading to the same results, more or less.
We’ll skip the details for this morning. You’ll hear plenty of them in the days, weeks, and months ahead – promise!
Instead, this morning, we’ll turn to our Trade of the Decade for the next 10 years. There are, of course, two sides to this trade…the long side and the short side. We had no trouble finding things to put on the short side. In a de-leveraging period almost everything goes down. We could have stuck with US stocks, for example. They’ll probably continue to come down…just as they did in Japan.
But who knows? US stocks just had their worst decade since the ’30s. What are the odds that they’ll have another bad decade? We don’t know. But what we look for in our Trade of the Decade, for the sell side, is something that has just had its best decade ever…something that has been going up for so long people think it will go up forever…something that everyone wants.
What does that describe? Well, the thing that comes closest is US Treasury debt. Yields have been going down (meaning, the price of debt is going up) since 1983. And now, despite a supply that seems to be going off the charts, demand for Treasury bonds, notes and bills has never been stronger. What’s more…if our analysis of the US economy is correct…the supply of Treasury debt is going to continue to rocket upward for many years. Deficits of $1 trillion to $2 trillion per year are going to become commonplace.
How long will it be before the market in Treasury debt crashes? How long will it be before hyperinflation…or a debt default…sends investors running for cover? We don’t know…but it seems a likely bet that it will happen sometime in the next 10 years.
So, on our sell side…we’ll put US Treasury debt.
How about the buy side? Ah…that is something we’ve struggled with. While there are many things that seem likely to go down, there aren’t many that seem destined to go up. Let’s see, what has been beaten down, dissed, battered, and abused for the last 20 years or more? What is it that people don’t want? What is it that they expect to go down…possibly forever?
Of course…Japanese stocks!
So there is our Trade of the Decade:
Sell US Treasury debt/Buy Japanese stocks.
Maybe not. Treasury debt has been going up for the last 27 years. Japanese stocks have been going down for the last 20 years.
Does this mean we’re giving up on gold? Not at all. We’re sticking with gold. Aurus eternis, or something like that. The yellow metal is what you buy when you think the financial authorities are making a mess of things. We have little doubt about it. So we’ll continue to buy and hold gold…until the financial system blows up.
But gold at $1,100 an ounce is fully priced. It is not cheap. It’s been going up for the last 10 years! At this level, it is insurance against a monetary catastrophe and a speculation on when and how the blow-up will finally come. It is definitely worth having. And holding. And using to protect your wealth.
But the trade of the decade is a way of making money…by buying/selling two opposing assets that are at extraordinary valuations. It is not a speculation on what MIGHT happen. It is merely a bet on the phenomenon known as “regression to the mean.” Things that are out-of-whack tend to go back into whack…
If we’re right, over the next 10 years, the most popular investment of 2009 – Treasury debt – will go out of fashion. The least popular investment of 2009, on the other hand – Japanese stocks – will surprise everyone by finally showing signs of life.
In any event, the trade is fairly low risk. What are the odds that US Treasury debt will go up? What are the odds that Japanese stocks will go down? Of course, we don’t know…things that are out-of-whack can get farther out-of-whack. But we count on time to sort it out. And hope we live long enough to be able to say, “we told you so.”
Best wishes for 2010!
Bill Bonnerfor The Daily Reckoning
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.
“Does that mean gold will go up in 2009?”
Don’t you mean 2010?
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Buy stocks. Buy stocks. Buy stocks.
That’s all you need to know. You’ll have a great decade. There’s a ton of upside left here as I keep telling you since Dow 8000. Forget gold – it’s just going to flop around a bit before the big fall.
I can go one better. Trade of the century. Long Tulips. Certainly they’ve been trading down for the last 2 or 300 years.
Signed up for the Agora Financial Reserve and you bastards doubled billed my credit card. And now your customer service department won’t return calls or emails. Great scam your running!!!!! is that how you made all your money?
Pissed off in Oz
Hopefully you didn’t pay for any financial advice from E. Albuquerque. If so, you overpaid twice. Ask me how I know.
Trade of the decade: Pb. You heard it here first.
I followed your advice on the ‘Trade of the Decade’ by investing heavily in mining shares. I sold most of them in December, but I am keeping my physical gold and silver as insurance. It represents about 8% of our net worth.
Being in mining shares during the Zeros made us a lot of money.
I started investing in Japanese stocks in 2008 ( obviously a bit early), and intend to increase my position. In the next few weeks I will start shorting the +20 year treasuries (TBT).
Thanks for all the educational, entertaining, and profitable missives you have composed over the years. Hopefully we’ll make it to the end of the next decade to see that your predictions were correct.
That’s great that you were telling us since DOW 8000 to buy stocks, but if you are honest you will admit a perma-bull like you has been buying since DOW 14,000.
Treasuries down, maybe. But Japanese stocks up? Where are the fundamentals for this one? Regression to the mean is a thesis, nothing fundamental.
BB is trying to get away with a fast one. In the book his “Trade of the Decade” involved selling the last one for the new one. He doesn’t sound willing to part with the shiny stuff just yet, and neither am I.
Of course there is no reason to expect the turning point to sync with the calender. Despite all the crap I give Harry, in the last year I have bought more stocks than metals. But no stocks at 35 times earnings with no dividend. Sorry Harry, I couldn’t help it!
Bill, great stuff.
What about shorting the Japanese long Bond? which now yields arround 1.3% for the 10-year, versus some 3.8% for the 10-year U.S. teasury. More room for Japan interest rates to move higher?
Apparently there is no ETF for this.
One can short the Yen with YCS. That might make sense too?
To buy Japan stocks one can buy the ETF EWJ.
I am… the investors friend
you took a big ole branch and made a swat at a hornet nest
Generally, I would agree with the buy the unloved. Unfortunately, Japan is still what the future US will look like. High DEBT to GDP (and growing). Moreover, demographics are Japan’s unlimited downfall. Their population is not maintaining the mandatory 2.11 children per family to maintain population size. So, who is going to pay for all the elderly’s pensions? Saving rates have also plummeted in Japan. Maybe if you wait for Japan to implode and hyper inflate first…
In the trade of the decade 2000 -2009 it was easy to do the sell side(stocks) but harder to do the buy side ( physical gold ),now its easy to do the buy side but hard to short treasuries .So tell me all the ways to short treasuries. Thanks.
Forget the TBT, way too much compounding effect and it will be a losing trade in the long run even if Treasuries fall in price.
Best way to short Treasuries is to short the CME 30-Year Futures. Better yet, wait till the Ultra Bond Futures start trading on Jan 11th and short those.
If futures represent too big of an investment (min lot size of ~$100k), you can also use the TBF which is the 1X inverse.
So then the Japanese economy is about to have a great decade? But it’s depression has not done its job, right, because the government has prevented it. So one or the other of your theses is wrong: Either a depression can be cured by government meddling, or Japan is not about to recover. If it does not recover, what are the prospects for its stocks? Could they not continue to drop as Japan de-industrializes?
Is it better to short the US dollar and/or YEN and buy the AUD and/or CAD,NZD,BRL.
Standard Chartered bank believe the real will benefit from Carry Trades… The dollar will be sold at its uber-low rate, and the real will be bought with its uber-high rate… as Brazilian rates are expected to move from present 8.75% to possibly 11% to 12%
informed observer say japan has most tangible patents of any country after usa and ready for future expansions, of course with willing and ready industrial and consumer customers
Starting to think the DR was better without comments.
Any negative comment about Japanese stocks don’t think about that this is a 10 year trade. I’m amused that people think that its a bad trade.
Sure the Japanese stock market could go lower. Its gone lower since this article. That’s good! I’m starting to think the Japanese will be providing high tech to emerging economies. Also the old folks will be selling their government bonds. Sounds good to me! Thanks Bill!
Now in Nov 2010.
No bounce (or kiss) lasts forever, neither does any fall.
Buy gold, by all means it has integrity.
Inflation will hurt all assets, but some assets are more inflation proof than others.
Buy stocks at fair prices, not the stock market. Stocks that have superior growth characteristics or long term, low cost, durable competitive advantage (they will price up for inflation, they will not have to spend inflating dollars on their assets, whilst at the same time the value of those assets will rise in line with inflation.)
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New Trade of the Decade?
You should have stuck to you old trade of the decade…Gold, which is up 75%.
Your new Trade of the Decade short TLT and long EWJ has resulted in a 50% loss!
You may be right by the end of the decade, but how many people can stick with this “trade” with a 50% loss after less than three years?
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When you've got a room full of 200 oil insiders scratching their heads at current high prices, something's gotta give.
For most investors, it’s weird to think of stocks as their go-to investing option.
The petropoly has bills to pay and setting the price of oil was a simple way to balance their budgets.
Investors don’t seem to care that what's propping up their investments is what will ultimately destroy them: government monetary policy.
For the next decade the energy revolution will be likely confined to the US, displaying the robustness of American entrepreneurship.
Why the Sage of Baltimore’s commentary persists through America’s changing times.
After attending Platt’s oil conference in London I want to relay two important themes you need to know.