In the markets, I generally follow a contrarian philosophy. When an investment thesis becomes common knowledge, I likely want to do the opposite or stay out of the market entirely. This was certainly the case when I was bombarded with relentless radio, internet, e-mail, and television advertisements educating me about the importance of protecting my wealth by buying gold. I agree with the long-term philosophy; that a large increase in the money supply should result in a long-term destruction of the dollar. The problem that I had was that buying gold was *the* right answer right now. Nothing is ever that simple and if Joe and Nancy down the street know about it along with everyone else who seemingly wants to flaunt their superior investment knowledge, then I want to walk the other way.
Gold is a fear asset. It can run up tremendously and it can crash spectacularly. If I am looking at preserving my wealth, then I want hard assets out of the spotlight of the media: silver, land, real estate, grains, oil and other tangible goods. The gold example is merely setting the stage for my main item of interest. For the last few weeks it has become common knowledge that the economy is slowing, will enter into a double-dip recession and the United States will most certainly follow the path of Japan’s lost decades. It’s as simple as that, so buy as many bonds as possible today because rates will surely be lower tomorrow. Therefore, $33B flows out of equities this year, $136B flows into taxable bonds and Johnson & Johnson offers a 10 year bond at a 3.15% yield (lowest corporate 10 year yield on record) while their stock earns a 3.7% dividend yield.
What should send a shiver down everyone’s spine is just how negative most economists have become. These are the same economists who were mostly upbeat going through the financial crisis. The New York Times ran a good article titled, “Economic Pessimists Gain Cachet“. The economists are only outputting what is desired from their clients – an even more dire prediction than the guy who made it to the front page of the Wall Street Journal last week. It is called the confirmation bias, to seek out information to support our preconceived position or opinion, the stuff of financial (bond) bubbles. Things might not be all that rosy, but I certainly take pause when our certain demise becomes common knowledge.
