Greed – The Most Addicting Drug Out There!

screen shot 2015-09-29 at 8.50.17 am

Looking back, the last post I put out was obviously emotionally charged. In hindsight, I probably should have just held back from releasing it altogether since I didn’t allocate much more than 5-10 minutes to write it up… Many of my thoughts were disjointed and not many details were shared…

It was rushed…

But I am human, I make mistakes, and sometimes I let my emotions get the best of me.

I hope you can forgive me…

These days, what’s causing me so much frustration?

Contrary to perhaps what one might think, it’s not that the equity markets are crashing or rallying (yes, I am invested in gold mining stocks, but outside of that I have no stake in the game) on a regular basis… I’m not a short-seller, and quite honestly I really don’t care that much about how my gold stocks are performing right now… That “Greed Trade” is a 3-5 year speculation, and believe me, I have more than enough patience to ride that story out…

Anyway, what’s causing me so much distress is what I am seeing all around me… Yes, it’s true that I live in Silicon Valley (aka Bubble Land), and for the last 3-5 years, I’ve watched investor after investor getting more and more greedy with the markets…

It’s almost quite sickening to observe, really…

So much hubris sets in that you start to wonder if these investors aren’t blind…

Seriously…

For example, even after property prices have climbed up by $400,000+ on a single family home (SFH), a lot of these folks are still mightily interested in searching for the next “fix and flips”… Almost like they feel invincible (reckless abandon), and that the odds that they’ll be left holding the bag are as close to ZERO as possible…

I’m sure in 2006, 2007, there were many real estate investors who also felt the same way… Oh wait, that’s right, I’ve met a few of them in meet ups before… Yeah, those same investors who got the most greedy at the end of the cycle and ended up filing for bankruptcy… That’s right, they did warn me about being careful and not ending up with so much debt that I risk losing EVERYTHING, like they did!

But sadly, until the stock markets turn south for good, almost no one living inside Bubble Land will care at all!

Most investors have nothing more than short-term memory…

As I’ve alluded to before, in an era of Zero Interest Rate Policy (ZIRP), when you make money essentially “free”, investors/speculators will sign up for all that they can get and abuse it to no end…

Right now, I’m alarmed that some of my friends and co-workers are still getting caught up in all the hoopla, and the Fear of Missing Out (FOMO) is causing them to lose their brains…

For instance, one co-worker who works extremely hard all day designing integrated circuits (ICs) to support his wife and 2 kids, is being scolded upon on a daily basis to “hurry up and buy a house already before the markets run away…” As someone who is the sole breadwinner for the family, you can of course appreciate the fact that this man has very little time to follow the markets and news developments…

He’s just trying to make ends meet, and the fact that he hasn’t been able to win a house these last 3-4 years has put him in a tough spot… I’m sure all around him, he’s feeling the pressure to pull the trigger now or risk “renting for the rest of your life.”

But that’s how the biggest financial mistakes are made!

Markets Do Crash!

I don’t know what it is about me, but I always do my best to NEVER forget important life lessons that profoundly impact me. As I’ve stated far too many times already on this blog, the financial crisis of 2008 left a permanent mark on me…

I cannot and will not ever forget it…

I saw first-hand the enormous amount of devastation that buying into the market at the wrong time can do to a family… Some of my brother’s closest friends had to foreclose on their properties… Many other friends who bought in 2006 ended up having to support mortgages that were TWICE as much as what the market valuations were reduced down to in 2011…

Ouch!

This is physically, emotionally, mentally, spiritually DRAINING! Families get torn apart because of finances, and I’ve seen this story play out before…

It’s really sad stuff… which is why I refuse to ever forget these life-changing moments… even if they weren’t my own personal experience.

But one thing I learned during the last crash was this — No one will EVER ring the bell at the top of the market… A market crash never seems obvious until after the fact.

Staying Grounded

With that knowledge in mind, I’ve always done my best to stay grounded as an investor, never letting any individual successes get to my head too much…

I never wanted to get wiped out, or blindsided by greed.

Yes, there are times that I stray too much and I get big-headed, thinking that I am a better investor than I really am… Hopefully when that happens, my friends, family, and even blog readers will be around to put me in my place!

But for the most part, I’ve learned to be content with my gains… I made over $1,000,000 during the last cycle and was 100% content with checking out late last summer.

I sold out of all my dividend stocks.

I cashed out of all my index funds.

I converted everything to cash and physical bullion (gold and silver).

But yes, I did manage to hold my 8 rental properties for cash flow…

Many of my investing peers were not content… They kept on buying… They kept on taking millions more in debt… To this day, some of them are still out looking for the next deal… It’s almost like they need to be smacked in the back of their head before common sense will return to them…

Despite all the capital gains and passive income, I knew that I had to draw the line in the sand somewhere… All good things come to an end, and winter always follows the fall which follows the summer.

By summer of 2015, I wasn’t sure exactly where we were, but I knew that it was getting late out… and that at some point:

Winter is coming.

As I’ve always believed, it’s better to be a year early than a day too late…

Today’s Markets

Look, I don’t have a crystal ball, so there’s absolutely no way for me to really know where things will be headed next… But I think if you’re being objective, there’s no doubt that there are cracks in the foundation right now…

The important thing is to look at this sensibility… Too many investors are either permabulls or permabears… In a long-term investing career, you must learn to see (and embrace) both sides of the coin…

And if there is ever any doubt (like right now), look at things from a risk vs. reward perspective… Does the reward justify the risks involved?

If not, do NOTHING, stay cash strong, and wait things out until a clearer picture develops…

Walmart closing 269 stores (154 in the U.S.):

From USA Today:

Walmart

Baltic Dry Index Falls to Record Low of 369:

From Ship & Bunker:

Baltic Dry

bdiy vs trade

From Business Insider:

So why does this all matter? Well, the most recent time the Baltic Dry Index crashed was just before the 2008 global financial crisis, and many market-watchers say it predicted the crash.

There are several other occasions when the index has pointed to a big correction in the global economy. The Baltic Dry Index has existed in its current state since 1985, and it had its first big drop in mid-1986, just under a year before the Black Monday crash hit markets in 1987.

In 1999 the Baltic Dry slumped to 12-year lows, very soon before the dot-com bubble burst. It slumped again to another massive low in 2001, around the same time the US economy fell into a recession that lasted until 2003.

Of course, there’s skepticism over whether the Baltic Dry can actually predict global crashes, and no one is claiming that it is a perfect predictor of what the world’s markets will do.

But other corners of the market are starting to ring alarm bells — William White, chairman of the OECD’s review committee and former chief economist of the Bank for International Settlements, suggested on Wednesday that the stresses in the financial system were “worse than it was in 2007,” and Goldman Sachs says a ballooning debt bubbling in Asia is creating the “third wave” of the financial crisis.

Bloomberg Commodity Index:

From Bloomberg:

A gauge of returns on raw materials tumbled to the lowest since at least 1991, extending the agony that producers of energy, industrial metals and agricultural commodities faced in 2015.

The Bloomberg Commodity Index, a measure of returns from 22 raw materials.

Bloomberg Commodity Index

Oil Bust Just Heating Up:

Oil Bust

From CNN Money:

Three of America’s biggest banks warned last week that oil prices will continue to create headaches on Wall Street — especially if doomsday scenarios of $20 or even $10 oil play out. 

For instance, Wells Fargo (WFC) is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.” 

JPMorgan Chase (JPM) is setting aside an extra $124 million to cover potential losses in its oil and gas loans. It warned that figure could rise to $750 million if oil prices unexpectedly stay at their current $30 level for the next 18 months. 

“The biggest area of stress” is the oil and gas space, Marianne Lake, JPMorgan’s chief financial officer, told analysts during a call on Thursday. “As the outlook for oil has weakened, we would expect to see some additional reserve build in 2016.” 

Citigroup (C) built up loan loss reserves in the energy space by $300 million. The bank said the move reflects its view that “oil prices are likely to remain low for a longer period of time.” 

If oil stays around $30 a barrel, Citi is bracing for about $600 million of energy credit losses in the first half of 2016. Citi said that figure could double to $1.2 billion if oil dropped to $25 a barrel and stayed there.

 

And so on and so forth…

All this news is out there, it’s not “hidden” secret information…

It’s just that when you’re consumed with greed and living in a bubble, sometimes it’s difficult to see what’s staring directly back at you…

My Take

Why am I not participating in any kind of bargain hunting? Well, it’s quite simple really — I still see far too much greed out there to entice me to invest right out…

All across the board — Index funds, dividend stocks, expensive real estate, etc…

When most everyone else is still mightily interested in a certain asset, I’ve learned that it’s probably best for me to sidestep it for the time being, and hold out for a better opportunity later…

Most investors are far too keen to jump into the fray right now because they perceive that there are bargains after bargains to be had…

Hardly…

I remember vividly what it was like to buy up assets (real estate, index funds, dividend stocks) at the bottom of the cycle (2009-2012), and this is NOT in any way, shape, or form, similar to that experience…

I mean you could of course buy right now, but if the markets then decide to massively sell off (this current sell-off is the conclusion of pregame warmups, at best), then what?

You’ll keep eating it on the way down and I don’t think anyone has a real sense of how bad things might get…

And if you use up your ammo now, how can you buy for “pennies on the dollar” later (when the real wealth is made)?

This is just my own take, but I really don’t feel like anything you buy right now (outside of gold/silver mining stocks) will produce any type of life-altering gains for anyone in the next few years…

Sure, you might make a pretty penny, but hundreds of thousands of dollars? That seems highly unlikely at this point in time.

Yes, long-term I definitely LOVE copper, uranium, energy, oil, etc., but there’s just too much excess inventory right now… Prices have, and can keep going lower…

So, I’m trying to be patient before I rush in to buy more Energy Fuels (UUUU), or Ivanhoe Mines (IVN.TO), etc.

But when these stocks finally do bottom out, commodities will be the buy of the decade…

In the commodity space, I would say gold/silver are the only exception because they’ve already experienced a brutal 4-5 year bear market, and those assets have traditionally been used in the “Fear Trade” as real money to hedge against market calamities. In essence, gold/silver should be anti-correlated to the rest of the markets, even if that isn’t evident at this particular moment in time.

I mean, you can’t really have a “glut” supply of “excess” gold… Gold is not heavily used in industry, and for centuries, all the above ground gold that’s ever been mined is STILL THERE… resting comfortably in bank vaults.

So, when it comes to gold, I have no concerns with “oversupply”.

For anyone who thinks oil is near a bottom now, you really have no idea how bad things can get in the commodities sector! The majors such as Chevron (CVX), ConocoPhillips (COP), even the almighty Exxon Mobil (XOM) are still holding up very strong, and we haven’t even had enough time to allow low oil prices the ability to penetrate into earnings reports yet…

Let’s wait and see how those numbers look before we go dashing off to buy more shares…

Yes, I realize that companies such as CVX, XOM, etc. are vertically integrated operations and are much more diversified than your typical gold miner… It really is like comparing apples to oranges…

Nevertheless, if you really want an idea of what destruction in the commodity space looks like, plot the charts of Barrick Gold (ABX), Newmont Mining (NEM), Kinross Gold (KGC), etc. But even some of the streaming companies, which in theory have a different business model, such as Silver Wheaton (SLW), have been absolutely dreadful performers over these last few years…

The entire gold/silver industry has been whacked… I guess Franco-Nevada (FNV), the highest quality streamer, would be the one exception… FNV is the Gold Standard of gold stocks…

When the oil majors fall 80%+ and see their dividends slashed (or suspended entirely), then we’ll start talking!

Of course, I personally can’t see anything quite that bad happening because unlike gold/silver, oil is universally beloved by income investors… especially stocks like XOM and CVX… For the same type of devastation to impact the oil majors, we would need a sustained period of say sub $30 oil… Things would have to get bad enough where one of the major Dividend Aristocrats has no choice but to cut the dividend…

Only then will the major oil stocks really sell-off…

So, I just can’t see the bargain in rushing out to load up on XOM, CVX, COP, etc. like most everyone else is doing… These investments (at today’s prices) won’t produce any life-changing gains for me, so really, why bother right now?

If I’m going to try and snatch up bargains at the lows, I want assets with a very realistic chance of going up 3x, 5x, or maybe even 10x…

As of right now, I  can only see that happening with the best mid-tier gold stocks that have: wonderful assets, safe jurisdictions, lots of cash in the bank, minimal debt, and a terrific management team; yes, you need all those ingredients to insure your investments will be able to weather the harshest of winters…

For the most part, oil ain’t seen nothing yet…

Conclusion (Hoard Cash)

So, when in doubt, do the easy thing — Nothing…

Right now, I just see way too many headwinds for me to want to jump into any investment, really… Even as it pertains to gold mining stocks, I’ve put on the brakes, and right now my only interest is in hoarding more cash

Cash is king in a deflation!

If/when this deflation cycle finally grabs hold for good, I think we as investors will have some buying opportunities of a lifetime… That’s a good reason why I’m currently holding $120k+ in reserves…

Yes, I know that the deals out there might looking tempting right now, but if you want to relate this bust to 2008, we still have a loooooooooong ways to go… I’d rather not catch any falling knives, as I feel confident that the best deals are still to come…

Greed does some CRAZY things to us… It not only blinds us to keep chasing after assets (in spite of many thunderclouds fast approaching), but it also encourages us to forsake millions in the attempt to latch onto pennies…

Really, the only fortunes being made right now are from the short-selling side of the trade…

For all you long-term “Buy and Hold Forever” types, it might be a good idea to focus more on defense and cash… An extra 3% or 4% yield stock isn’t going to turbocharge your progress towards early FI that much…

I’m practically financially independent now, as a consequence of being able to take advantage of a buying opportunity of a lifetime between 2009-2012.

Patience will be rewarded.

 

There will be a time to be a hero in this market… Just not now.

 

Fight On!

Print Friendly, PDF & Email
Sharing is Caring:

19
Leave a Reply

avatar
6 Comment authors
Financial SamuraiMidwestern LandlordFI FighterNo Nonsense LandlordJon Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
Martin
Guest

I have been writing about the BDIY as well as transportation index and money supply base in the economy and how it affects the markets for sometime on my blog. Still you find a lot of people who believe the US economy is rosy and doing well. But we are not an island. If the world around us is crashing, commerce is basically halted (just check the Marine Traffic website), PMI is in recession, we are seeing deflation, GDP is slowing, all this points we are in recession. The markets have predictive ability so the recent drop is not just… Read more »

Financial Samurai
Guest

Do you think perhaps the reason why you are so emotional is because the $1,000,000 in gains might not be real or liquid?

You have been writing about financial freedom and quitting your job once you got to $1M net worth. Maybe that’s all it takes? Actually going through with freedom by leaving your job might finally put you at peace. I know change is scary, but sometimes you just got to make the move!

Sam

Jon
Guest
Jon

If the JPMorgan CFOs biggest source of stress is $750m of losses over the next 18 months due to low energy prices, then I’d say that’s a pretty bullish indicator? Their earnings are around 20bn annually.

No Nonsense Landlord
Guest

I am still in the stock market, for a double comma amount.

I am relying on 130+ years of history. It may be different this time, but likely not any worse than the great depression, great recession, stagflation, WWI/II or a whole host of other world events.

Who knows what will happen this time. I suspect, as most advisers do, that regular investments over time, will still prove to be a winning strategy.

Jon
Guest
Jon

I am with you in the mining trade, and I think the best thing that can happen for us is the market trundles along flat for the next few years, giving the capital cycles time to play themselves out. A massive crash wouldn’t be good for the mining stocks, just as it wasn’t in 08.

Midwestern Landlord
Guest
Midwestern Landlord

Jay, One of the reasons why I really like your blog is you are not afraid to think outside of the box and go against the herd mentality. As I have always said, if the herd mentality works then why are most people not FI. Buy and hold investors had a nice 5 to 6 year run. Now reality is setting in. Equities can’t just go up forever. I think it is completely reasonable right now to be defensive and risk averse if one has built a sizable nest egg that they want to preserve. I certainly understand your perspective… Read more »

Jon
Guest
Jon

Keep doing what you’re doing man. Ignore the trolling. The fact that all of the index and dividend investors have such visceral reactions to the mining thesis probably means were are pretty close to the bottom…

Jon
Guest
Jon

Have you ever put any thought into how to play the BDI? I’ve been doing some research into this and it seems like a very interesting opportunity.

Close Menu