NO TRUE SAFE HAVENS LEFT ? : THE PROBLEM OF WHERE TO INVEST / SEEKING ALPHA ( VERY HIGHLY RECOMMENDED READING )

The Problem of Where to Invest

by: Kimball Corson

November 05, 2009

If, as Nouriel Roubini suggests, we face an asset price bubble worldwide, arising out of the Fed’s zero interest rate policy and the carry trade, what assets are safe for long positions in this bubbled up condition?

Not the dollar, if the Fed drops that policy or complications arise. Besides, basically the dollar is going nowhere, neither solidly up nor down. It mirror images the reverse of the stock market, also going nowhere.

Gold and silver? They too are bubbled assets, but silver less so.

Brazil, the emerging markets, China and maybe the BRICs? As I have shown elsewhere, because of trending in the stock market and human nature, ETFs and the like in these areas move or trend with the market, and are therefore are too open to collapse in a deflating price bubble, regardless of underlying real conditions.

No sanctuary there. Foreign currencies? Perhaps, but only if financial assets have not bubbled up in the relevant country, from the mother of all worldwide asset price bubbles.

Perhaps the Brazilian real, as Brazil struggles to isolate itself from these problems and its own economy is relatively healthy. The real has moved above $0.50US recently for the first time and now hovers near $0.58. But such investments are not easy or practical for many. Too, U.S. access to the currency may be subject to the trending problem I identify above. Not too much is left.

If the Fed decides at some future point to reverse its zero interest rate and associated policies, then the threat of collapse in asset prices world wide increases markedly. If it does not reverse its policies, but instead prolongs them, then more worldwide asset prices will continue to rise to accompany those already bubbled up.

However, price rises in assets already bubbled up tend to occur more slowly, as caution and better knowledge of the situation set in, just as in our own stock market. Serious slippage in prices can occur, but has not yet developed in our own stock market. Just understanding the situation and believing the gains of being in the market are not worth the risks can sideline many, but as I will show, they are not really sidelined. There are very few if any sanctuaries from the systemic risks.

Yet short positions entail some danger here as well these days, although mostly minor from small movements to the upside. Shorting anything much can therefore be as risky and profitless as taking long positions. If that is so and we face bubbled prices, is there anywhere left to safely invest?

The quick answer is largely nowhere, on simple long and short positions. Cash, if the dollars slides, is no better than gold if asset prices fall. Few foreign currencies are not similarly vulnerable from their own local asset price bubbles.

The problem is further compounded by most real economies, other than China, several in the far east and Brazil. The real economies of most major national players on the world scene are too much going nowhere. Many, like the U.S., hover at zero growth or worst and that growth is from a lower depressed level that some say is going to be the world’s “new normal” because structural problem in the U.S. and in other countries are not being addressed. In short, from these circumstances, we find no immediate and compelling argument, to take long or short positions, especially given the risks and poor returns. We get no help from this quarter either.

We seem to be trending nowhere in real or financial terms at the moment, but simply sit hovered near the apex of too many asset price bubbles. Presently, the Fed’s policies are doing more to expand the scope of those prices bubbles worldwide than they are to press existing price bubbles higher. This is because of the risk and return problem I identify here and the higher returns on more remote and less accessible assets in the world that are not so bubbled up. The far corners of the world affected are not so easily reached by U.S. investors who lack ready access.

Gold, silver and other precious metals cease to become a worthy store of value to the extent their prices are also bubbled up and face the prospect of collapse or decline like other prices. Sure, the store of value function might well be restored with a huge collapse, but consider the losses incurred by hold such assets to reach that point. This is the reason more countries have not followed India’s example of stock piling gold. Only a Fall of Rome scenario, like that painted by Richard Duncan, gives stock piling gold any real prospect. The more likely prospect is many will simply buy such metals at higher prices and then watch their prices fall.

The perversity of the situation is that not even cash – the classical refuge from the market – is safe. The dollar too is vulnerable, especially if we consider the prospect of inflation. Too many seem not to realize this and think that by being out of the market and into cash they are shielded from risk. Some risks, yes, but not the risk of a declining dollar or the prospect of inflation.

We no longer face, in any particular stock, just the risks of a good company facing an uncertain economy. We have that situation and more. We face in any particular stock now not only market trending risks, but certain serious systemic risks arising out of the policies that have been adopted by those who make them in Washington. The systemic risks have increased markedly and affect us all. They arise largely as a set of unintended and unforeseen consequences by policy makers.

We proceed at our peril. All of us should come to realize that there are no true safe havens left and, regardless of how much we would like to garner a little profit now at minimal risk, few good opportunities exist to do so either, long or short.