Investing is dead

Investing, at least as we knew it, is dead! It died when markets became dominated by political rather than economic events. Investing principles that worked for most of the last 150 years are irrelevant in today’s politicized world. ...

Most of what we learned about investing should be forgotten, at least until governments, society and markets return to honesty. If that occurs, it will be a multi generational process, As a result, no one alive today should consider himself an investor.

Don’t confuse Warren Buffet and his ilk with investors. They may have been at one time, but are no longer. They are political operators who utilize politics and connections to their personal advantage. Unless you are very big, well-connected and willing to pay to play, you cannot play in their league. If you fit the aforementioned categories, you already have forgotten about investing and are playing a more sordid but profitable game.

Monty Pelerin, "Playing Chicken in Your Golden Years"

Hat tip: Zero Hedge

You can still put money in the market and possibly you have no choice if you don't want to lose by default. But the author of this piece is right. Don't kid yourself you can invest according to the "time-honored principles" beloved of institutional salespeople, also known as stockbrokers.

At best, you are trying to game the system -- a system now largely abandoned by individuals other than options traders. It operates according to corporate-political alliances and is  activated by computer-driven high-speed trading, which can buy and sell thousands of shares in microseconds.There's no law stopping you from piggy-backing on the moves of big-time players, perhaps getting a taste of their profits ... or losses. But what worked, generally, before the dot com madness is irrelevant today.

That's not the worst of it.

In the past, companies could blow it and flatten your wallet, but you had a decent chance of calculating the odds of your investments and taking advantage of them. If you did your research, had a sense of the economic overview, and could compensate for your emotional biases, chances are you'd be rewarded on the whole.

Nowadays it's not only corporate slips and falls that you have to worry about. It's heavy-handed governments. Continuing to clasp their power and privileges, they can't let the markets work according to archaic principles of supply and demand. They must direct the show.

Monty Pelerin:

For the last half-century government has pretended that it can manage an economy. Any slowdown brings the same reflex-action – expand liquidity and increase government spending. ...

Decades of Keynesian interventions to prevent the business cycle have succeeded in weakening economies around the world. Each intervention was an attempt to prevent distortions to prices and asset allocations from correcting. In the attempt to prevent the corrections, government action added more imbalances. Today, most developed economies are filled with distortions and unable to operate efficiently, grow or create wealth.

The political interventions have reached their limits, at least in terms of covering up economic weakness. Trillions of dollars have been thrown at the current economic downturn over the last five years. There has been no recovery, nor will there be until economies purge themselves of the distortions.

The first, automatic response of today's politician faced with a crisis is to ask: how can I make this somebody else's problem? If he can't find a suitable figure to hang the blame on, the next step is denial, followed by delay, followed by firm delay. It will come crashing down someday, but by that time he'll be retired, enjoying his gains from a career of public service, and sipping margaritas on the deck facing the Caribbean.

The favored tactic is to put a little distance between himself and ruin by handing the economy off to a central bank. The central bank, in turn, has its own delaying formats. 

One is so-called quantitative easing, a euphemism for money printing -- in a fiat currency system, creating money out of nothing. It works for a while, although eventually it cheapens the monetary unit. Even inflation has a temporary benign effect, taking some of the pain out of paying for runaway government debt. Of course it's an expedient, not a real solution: like losing weight by cutting off a limb.

Investors, whether they know it or not, have been forced into a gigantic game of financial chicken. ...We are all forced to play this game whether we consider ourselves investors or not. Staying in markets is taking risk, but so too is leaving markets. If a person believes that liquidity will continue to drive up financial assets (until it no longer does) and drive down the purchasing power of money, then his biggest payoff is to remain in markets up to the point of collapse. Leaving too early is costly, and leaving too late could be even costlier.

No one should be forced to play this game. Retirees and near-retirees especially should be living off the income from a life of savings, not playing chicken to survive. Unfortunately, the government policy of financial repression (low interest rates) forces them into such a situation. The further policy of counterfeiting money makes the situation even more difficult.

Pelerin's complaint isn't some wacko-fringe perception; it's easy to find many articles and books making essentially the same point. It's almost a consensus among financial sophisticates. 

For a good, detailed explanation of the dysfunctional sham economy we are caught in, check out The Aftershock Investor by Wiedemer, Wiedemer, and Spitzer. 

What's a poor citizen to do to keep body and soul together in an economy of manipulation and pretense?

String-saving austerity won't help much as your savings shrink in value.

There are countries whose economies haven't descended into cloud-cuckoo land, and you can invest in companies or bonds there. Unfortunately, the economies of the world, which now depend largely on international trade, are pretty much handcuffed to one another. The U.S. or E.U. falls into a sinkhole, it'll drag everyone else along for the ride.

Many people believe precious metals, especially gold, offer a lifeline. Certainly on the Day of Reckoning they'll be in great demand and their worth will go way up. But owning gold is far from a perfect solution.

First, remember that the Day of Reckoning could still take quite a while to arrive. Central banks have become very skilled at holding it off. They know just how much heroin to give the addict without killing him. Meanwhile, gold prices can rise or fall, and the metal doesn't  pay you anything in interest or dividends to wait.

Let's say you spring for gold, as much as you can afford, expecting a worst-case scenario. Nothing could be easier if you have the money -- just buy shares in an ETF, such as GLD, IAU, or SGOL. No transaction fee beyond what your brokerage charges, almost certainly less than the mark-up from a precious metals dealer.

Wait! Red light flashing! Your true-gold believer is sure the ETFs are fiddling! They allegedly don't actually have the gold in their vaults -- they've lent it out or they're lying. In any case, owning ETF shares doesn't entitle you to exchange them for real gold. It's "paper" gold, say those who scorn ETFs.

No, you've got to buy actual, physical gold for real security, they insist.

Right, what do you do with your gold coins or bars? You're not naive enough to put them in a bank safe deposit, are you? The bank may not open its doors, even for you, your lordship or ladyship. The government could confiscate your gold. You have to keep it where you can get to it when the great debacle arrives, but no one else must know where it is.

Secure as can be ... until you have to use it to buy or barter for goods during a societal collapse. You can get away with that once or twice. But you might as well wear a sign that says, "I have a gold stash." The word will get around fast, especially among criminals who will impolitely wake you up one night with a blowtorch and ask how long you wish this conversation to continue. What? Speak up. You say it's buried out behind the house? Let's go for a walk and see.

The fact that currency is being depreciated around the world has implications that should not be ignored. The risk of high inflation, perhaps hyperinflation, can destroy anyone on fixed income or who stands pat believing his savings is enough.

At the same time, the potential for an economic apocalypse has never seemed greater. There have already been two 50% drops in stock market averages in the first decade of this century.

 Good luck.