By Kirk Spano
Back in the spring of 2009, I became very bullish on stocks after four things happened:
The economic-stimulus package was passed to create jobs and partially catch us up on the trillions we are behind in deferred infrastructure spending
Helicopter Ben's first quantitative easing
A blow-off bottom in stocks
The President saying he'd buy stocks if he could
If you have read me, you'll know I was bullish right out of the gate when I started writing here, saying ” Your major risk in 2012 is missing the upside ” at a time most others were bearish. I was convinced that the coming revolution in American oil and gas — which I recognized ahead of most — would be a very big deal and thought monetary and fiscal stimulus would lift America out of a very dangerous situation. I have been mostly proven correct not only in my economic analysis, but also with investments that I've mentioned here
By late 2013 though, it started to become apparent to me that we weren't going to get the sustained economic growth we needed to have a boom period. Oppressive global debts and aggregate demand shortfalls driven by demographics in the four largest developed economies — U.S., China, Europe and Japan — are too much to overcome without another reset in asset prices. Despite that, money started to finally pour in from mom-and-pop investors into the markets for the first time since 2007. I warned that would end badly .
Where the world probably went wrong was relying too much on monetary policy, inflation targeting by non-reserve currencies in particular, and not actually building the things we need for productive economies. We have underinvested in infrastructure that is becoming dilapidated and other necessities that could become scarce in the next decade if we don't wake up very soon. Meanwhile, we have overinvested in toys and counterproductivity. Much of that is represented by very overvalued tech stocks that have IPO'd recently.
I am not completely despondent. I think there is a way for the global economy to rebound eventually, in fact, three ways, only one of which is horrible. But that doesn't really matter for this column. What matters here is that my thesis the past year or so that the big money was leaving the markets and that smaller investors were getting handed the bag is clearly true.
This past weekend in Barron's , there was a special section with a headline article that described how large wealth-management firms were holding more money in cash and short-term Treasurys. In Berkshire Hathaway's annual letter, Warren Buffett talked about holding cash and short-term treasurys, likely in response to the fact that Berkshire's cash and Treasury holdings have grown to a record.
What does the bigger money taking lighter equity-asset allocations and heavier cash allocations mean?
The first thing I would suggest, is regardless of which direction the markets head this year, there is a perception by people with big money, that investing is becoming more risky. If you are nearing retirement, that is something you should hear loud and clear.
If you aren't close to retirement, there is a huge opportunity for you. You might be able to make a couple of major asset-allocation decisions in the next few years that could profoundly impact your long-term wealth.
I have written a report, about to be updated and expanded into an eBook set for release on April 6, titled "Avoiding the Next Crash and Investing in the Next Boom" which is my blueprint for making investment decisions. It's actually a working paper. I'll keep updating it as the world moves forward, or backward.
Here's what I am telling people who are in our 401(k) Monitor program to do right now — move 25% to 50% of your plan balance to cash or short-term Treasury funds, depending on risk tolerance and time to retirement. For most folks, that means swapping a couple of equity funds for the money-market account or secured cash account in their plan.
In most of my managed portfolios, not only have I accumulated higher cash positions than I've had in the recent past, but I have also started buying longer-term, out-of-the money put options on the S&P 500 using the SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY -1.96% as a way to hedge my long exposure on my favorite stocks. I have chosen to hedge using the bigger companies in the S&P because about a third of the earnings in the S&P 500 come from overseas, and with a stronger dollar it is very likely that we start to see more significant earnings declines in the next few quarters.
Disclosure: Kirk and certain clients of Bluemound Asset Management own puts on SPY. Kirk has also recommended SPY puts at his investment letter services for self-directed investors: Fundamental Trends and The American Resource Boom Letter. Neither Kirk nor Bluemound clients plan any transactions in the next three trading days. Opinions subject to change at any time without notice.