Welcome to The Golden Sense! Hard times or good times? The choice is easy for us humans. As a group or as a herd we always follow the path of least resistance. It's the nature of the beast. It is much easier to in debt ourselves and keep the music playing rather than deal with our problems. So with that being known it is obvious for psychological reasons why the Federal Reserve is hell bent on stopping hard times from coming to the U.S. economy. They have been trying desperately to avoid the necessary economic restructuring for the past six years and it is coming to a point where something will eventually give way.
It is guaranteed that future market dislocations will be created by the government or the Federal Reserve. They try to "fix" or "manage" situations and often create unintended consequences that can be profitably acted upon.
Investing isn't all about making big profits. It's also about risk management and ensuring your livelihood. Contrarian investing is often thought of as buying assets or securities when everyone else is a seller. Not only is this a very effective way of investing, it is a great way to manage risk and position yourself to take advantage of opportunity. Being a contrarian means that you reject popular opinion or go against current practices. 2014 is shaping up to be a year in which the best practice will be to do the opposite of what everyone else has been doing. Right now, the best contrarian play is to pay down debt and wait to invest heavily when the markets become undervalued.
Many grown men will roll their eyes at this suggestion much the way sixteen year old girls do when their father lectures them about being irresponsible. Debt is a personal subject and it is typical for many people to claim their debt level is manageable even when it isn't.
Using your extra funds to pay down debt instead of invest and speculate is the best practice right now for a few important reasons.
Reducing your debt will most likely improve your life much more than investing in overpriced markets. The S&P, for example, is relatively close to its record high. By most measures, it is as pricey as '29, or '68, or 2000. Upon this sea of easy cash and credit, practically all stock markets on the face of the planet are sitting at elevated levels. The S&P is selling at 15.9 times this year's estimated earnings. The chart below shows margin debt is at all-time high levels. This means investors are borrowing to speculate on stock market gains. From this, we can see that we are indeed at a height of bullishness and speculative fever.
The bond market is another market that should be avoided. The 10 year treasury is below 3%. With these depressed rates, the bond market will not give you a return that is more satisfactory than reducing any debt you owe.
The precious metals market is a rare exception. Speculative positions might be taken in gold mining stocks. Wall Street and the mainstream media have written this market off. This is exactly why it is worth a look. The price-to-earnings ratios of the 15 largest gold producers are at their lowest level in 14 years, and less than half what they were when the bull market got under way in 2001. For this reason, gold mining stocks are a very interesting proposition. Of course, just because something is cheap today doesn't mean it will soar tomorrow. This however isn't the best decision for all people. Many investors like me who have maintained solid positions in the physical gold market for years and haven't been scared out, further investment might not be the best choice.
By taking a quick look around the world, it is obvious that the markets are wobbly and most assets are overpriced. The way you make big money with investing is by purchasing assets at great values. This of course takes patience to strategically position yourself for right time to invest heavily.
It is obvious that average Americans have a debt problem. The average American holds approximately $5,000 in credit card debt. In addition, a new report released by the GoBankingRates, which tracks interest and banking rates nationwide, found that the average American has more than $225,000 in mortgage debt with many having less than $500 in savings. The chart below shows that today household debt is still near pre crisis 2007 levels.
These debt levels are rarely sustainable. If hard times hit the United States many Americans will have a tough time paying off or maintaining their debt. This is exactly how hard times snowball and get worse and worse. 2008 was a great example of this. All the mal investments and bad debts get liquidated during tough times and demand for quality investments subsides. Remember, the best deals are made in the worst of times. If you have low debt levels and extra funds available during crunch time you can position yourself scoop up opportunity with both hands.
This is essentially a contrarian debt play where you reduce your debt while others continue to take more on. By doing this it will allow you to become a buyer when everyone else eventually becomes a seller. Opportunity is a powerful thing. Don't be the person who fears missing out when times are good. Position yourself to take advantage when times get bad.
Markets and economic conditions go in cycles. The market plays out series of events that are regularly repeated in the same order. In 2014 this upward ride in the domestic and global markets is getting increasingly long in the tooth. Eventually, the downside of the cycle will come. At this point you want to be the one with low debt and the ability to invest when the opportunity arises.
As the old British politician Benjamin Disraeli once said:
"The secret of success is to be ready when opportunity comes"
Signing Off,
T. Norman
