The Most Critical Rule for Investing Going Forward

By: Graham_Summers

Few commentators understand the manner in which 2008 changed everything, and I mean EVERYTHING about the investing world.  This was no mere Financial Crisis or Deflationary Collapse… this was THE game changer, the event that altered the entire investing landscape so that virtually every and all relationships between various investment classes was thrown out the window.

For most of the 20th century, investments were categorized by very distinct levels of risk. Because the US was the largest, strongest economy in the world, (and had a printing press), US debt was considered the only truly “risk free” investment on the planet. The returns generated by lending your money to Uncle Sam was the golden standard by which all other investment classes were judged.

You could attain higher gains with stocks these gains, but they came with greater perceived risk (of corporate default, mismanagement, or other issues). The same goes for commodities though the various risks were related more to weather patterns, price of feed or production, etc.

The Financial Crisis in 2008 changed ALL of this. As everyone knows by now, the central issue for the Crisis stemmed from too much junk debt, specifically derivatives which had grown into a $1.4 QUADRILLION (that’s 1,000 trillions) monster.

The central bankers’ response to this crisis (particularly Ben Bernanke) was to transfer this garbage debt ONTO sovereign balance sheets. Many commentators have tried to justify this policy as saving the financial system. It did no such thing. What it DID do was transfer the very garbage (junk debt, opaque accounting standards, outright fraud in the form of mark to model valuations) from Wall Street to Uncle Sam.

The implications of this are so vast that few people have realized them yet. By shifting this garbage debt like this, Bernanke, almost overnight, changed US Treasuries from AAA-rated, “risk free” investments to junk bonds (I realize the US already had major debt problems before this, I am merely trying to stress the fact that this transfer in garbage debt was what pushed us clearly over the edge).

Bernanke literally “bet the farm” that the investment world could swallow the idea that somehow the very garbage that took down virtually every Wall Street bank could be transferred to the US’s balance sheet WITHOUT damaging the US’s reputation/ rating. Doing this was the equivalent of moving radioactive waste from a landfill to a formerly lush meadow… all it does is spread the damage and wreck the balance in the eco-system.

The damage done to the investment eco-system is now clear in several ways, They are:

1. China and Japan paring their US debt holdings
2. From a “risk” perspective, the market indicates it is now safer to lend money to Warren Buffett than the US
3. Stocks continue to hold up despite an OBVIOUS and historic disconnect from economic realities

This final point only just struck me the other day when I was talking with Bill King, one of the top financial researchers on the planet. With US Treasuries now “compromised” investors HAVE To begin looking for safety (from a balance sheet perspective) in new places. Consider, if you had a choice to put $1 million in US Treasuries today or in some large low debt, high profit multinational (say Exxon or Microsoft)… which would you choose?

This is (partially) why stocks continue to hold ground: because with US debt’s “risk” status compromised, stocks are now more appealing from a “risk” perspective. It also brings up the most critical rule for investing going forward: finding safety.

The world remains awash with bad debt. The US has to roll over trillions in debt at the same time it must issue trillions more to cover its deficit balance. Stocks are extremely overbought, completely disconnected from economic realities and over-valued by most historic metrics. Commodities are also disconnected from economic realities, rallying largely on a flight from paper money. And now that the Sovereign Debt Crisis is taking hold, currencies are beginning to flash major red flags as well.

You can see now what I mean by saying that 2008 was a “game changer.” Under normal circumstances, US Treasuries would be rallying right now as investors sought safety from the obvious systemic risk permeating throughout the markets. However, with Treasuries “risk status” compromised, this is no longer the most sensible option which is why, in some ways, stocks are more appealing as a “safe haven.”

Please understand, I do NOT like stocks at these levels and am firmly in the bear camp. But from a “big picture” perspective, some stocks offer a strange new form of value in the sense that they have decent balance sheets and will likely STILL EXIST in the future (I’m talking about the Exxon Mobils, Johnson & Johnsons, etc).

The same thing can no longer be said about US Treasuries, the big banks, and much of the rest of the financial world.

Good Investing!

Graham Summers

http://gainspainscapital.com

PS. I’ve put together a FREE Special Report detailing THREE investments that will explode when stocks start to collapse again. I call it Financial Crisis “Round Two” Survival Kit. These investments will not only help to protect your portfolio from the coming carnage, they’ll can also show you enormous profits.

Swing by www.gainspainscapital.com/roundtwo.html to pick up a FREE copy today!

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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