Comment "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."
- Warren Buffett
How many times has history taught that the most successful investors eschew the herd mentality in favor of some original thinking?
Certainly Warren Buffett has a reputation for doing exactly what the majority of investors are not doing.
The panic selling that was the herd’s hallmark last week presents remarkable opportunities for the clear of eye and stout of heart. With some companies on the TSX Venture down by as much as 50% and more, the opportunity right before your eyes will go down in history as one of the most profitable for those who act now.
The human race is like a bunch of children when it comes to evolving our financial systems. Kids like to push and push and push until the thing they’re pushing breaks, and then they run away giggling to the next object of their gnat-like attention spans to torment that poor thing into a state of disrepair.
So the men and women lucky enough to be born into the top of the economic food chain have tinkered and toyed with the concept of credit so much that it’s finally exhibiting the signs of failure that visionary minds always held to be inevitable.
As mortgages and loans got chopped up and packaged into every imaginable configuration, the essential flaw in the scheme became ever more obscured: you can’t really redistribute a debt as an asset until it is paid in full. Of course, then it’s no longer a debt.
As loans were repackaged as “securities,” the theory clung to by the most ardent and willfully blinded fee-gathering money manager was that their downside would be protected through a diversification of the risk among funds.
HA!
Bad debt is bad debt no matter how you slice it.
If you lend a guy $10,000 who already owes $10,000 on each of 5 credit cards, plus $20,000 for a new car, who adds $12,000 a month in debt to his credit cards, and who makes only $60,000 a year (never mind the $4,000 a month for his mortgage), what good is counting all the debt as a fully paid asset and then chopping it up and redistributing it as a “security” with a triple A rating?
Yet that is precisely what has happened.
The editors of Angel Publishing would like to take a moment to puff out our chests in honor of the fact that we have all more or less been warning of this for YEARS!
But wait! The fat lady hasn’t even taken the stage yet. She’s not even out of BED yet!
Mortgage delinquencies in the sub-prime sector rose to 14% in 2006, up from 10% in 2005. What will happen if that figure rises again at the same pace? That means 20% of mortgages next year. And what makes you think that “prime” mortgages (as opposed to sub-prime) are any better?
What if U.S. mortgage defaults across the board rose to 30%, 40%, or even 50%? At what point do banks become insolvent, vaporizing savings, deposits and virtually every asset represented by paper?
Where happens to the value of the U.S. dollar?
Imagine this:
You’ve got 30% of your wealth in ultra-conservative fixed income diversified funds. You’ve got another 30% in blue-chip stocks, another 30% in real estate, and say 10% in cash.
It turns out on Monday that your fixed income holdings are exposed by upwards of 80% to Collateralized Debt Obligations and other Asset Backed Securities. Suddenly, they are unredeemable. The bank that runs the fund has just become illiquid and vaporized one third of your wealth. Poof!
As the mortgage meltdown continues, every financial institution under the sun starts calling in its paper on every transaction it has out. The banks won’t even lend to each other any more. The blue-chip companies are suddenly in default on lines of operating credit. Their investments were also largely exposed to sub-prime default, and they start to tumble like toy soldiers.
Ka-BAM! There goes another third of your wealth.
You start thinking about selling some of your real estate, but the economy has suddenly puckered up tighter than a mouse’s sphincter.
Demand is zero. Prices drop to many multiples below what you paid for the real estate. Your tenants have stopped paying rent. That whooshing sound you are hearing is the sound of your net worth plummeting downward.
Thank god for that 10% in cash, though! Phew!
What? Its in U.S. dollars? The dollars that yesterday took three to acquire a loaf of bread, but today it takes 20? And tomorrow will take 50?
Have I got your attention yet?
Make no mistake. This is the first shot across the bows in a corrective phenomenon that has been years in the making, and will take years to complete.
All of the things that hold real value, like gold, fuel, water, food and basic materials, will become the only thing to grow in value. A crisis in the confidence of our markets is spreading.
The imaginary wealth created by the value creation illusion that has been perpetrated on the citizenry by a global cartel of bankers and governments who collectively don’t have the morals of a murderer’s twisted black heart will evaporate.
The playing field will even up a bit, and we’ll get on with the game, a little wiser, a lot poorer, and certainly a great deal more skeptical of the ivory towers on Wall Street.
Now, the good news . . .
When the dust starts to settle, and the newly humbled administrators of substantially diminished fortunes start to look around for the limited opportunities for investment left to mankind, their eyes will be drawn ever so gradually to the bright lights and roaring fires of a big party, where feasting and merrymaking seem to be non-stop.
As they draw closer to the warm fire thrown off by the fuel purchased with foresight, and are intoxicated by the good cheer and sense of security that all the revelers exude, they will wish that they too had heeded the writings of the natural resource evangelists and bought start-up mining companies, and wildcatting oilfield drillers, and innovative new technology stocks.
For here, around this fire, at this party, are all the individual investors who did.
Can I get you something to drink?
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