Greetings. I have been ponding this current late stage of the business cycle. Things look a lot like 2007 to me. Given the debt levels and talk the fed will raise rates I smell a rat for this fall or spring 2016. I have gone to an all cash position. Which is very dangerous in and of itself. I am looking to diversify away from most US stocks. I am looking at.

1. Internationally "movable assets" such as gold or silver. Best and most secure ways to purchase.
2. Solid Chinese stocks or stocks in other economically stable places. And yes Chinese debt worries me.
3. Safe places for some cash that is accessible and reasonably secure. I am not up to speed on the tax consequences.
4. Looking at ETF's for the first time. Thoughts on that topic would be appreciated.
5. If I am wrong about the state of the US eco and its stability long term please explain why. Not looking for a debate but of sound information and opinion.

I have attempted to research this but there is so much crap and and self interested data that its tough to weed out the good from the bad. Appreciate any thoughts Aggies.

What bubble do you see as about to pop to cause another 2008 like recession? PS, I think we are still in the 2008 recession.

Solid Chinese stocks? I'd be super careful there.

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What bubble do you see as about to pop to cause another 2008 like recession? PS, I think we are still in the 2008 recession.

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Student loans is all I can think of, although we have started the subprime lending machine back up...

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What bubble do you see as about to pop to cause another 2008 like recession? PS, I think we are still in the 2008 recession.

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You can absolutely make that case. But to answer your question I see the dollar itself as a bubble. Has anyone checked out the money supply since 2008. And on a much smaller scale; education and student debt. The issue with the dollar and its status as the world reserve currency worries me. If it decouples I would like have some protection.

I understand the issue of world reserve currency and debt load, but the fact remains that there really isn't another currency that will likely be chosen.

The Euro would be the closest, but I don't think it holds that much more favorable appeal than the dollar. People who say the Yuan don't really understand China.

I don't think the student loan bubble will be as severe. The 2008 bubble was fueled by extreme leverage & derivatives which multiplies the effects.

The problem with trying to time anything like 2008, 2000, 1987, etc is that you can be exactly right about what will happen but not about when. You may give up as much upside exiting early as you save by missing the downturn.

Then you still need to guess again as to when to get back in. If you lived through '08-'09, think about what the vast majority were saying in the Spring of '09. Hell, some of the folks who finally guessed right in '08, like Roubini, have continually called for further collapse.

Don't take more risk than you can afford and are willing to lose. That's about all i've learned over 20 years.

What I would do...

Buy 1 or 2 year puts on the SPY.

Set a stop loss. This might create a tax event.

Disclaimer. This is not legal advice. I am not a professional. Consult a certified financial planner.

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I don't think the student loan bubble will be as severe. The 2008 bubble was fueled by extreme leverage & derivatives which multiplies the effects.

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Use of margin is the highest it has been in years.... it may create a cascade.

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What I would do...

Buy 1 or 2 year puts on the SPY.

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Why not just get bearish etf and avoid paying 2 years of theta and vol that you likely won't trade around?

Maybe some put spreads if anything but I'd think that would still be relatively pricey for the stated goal here.... And if you do that, keep some of your equity position on vs. just going naked short while holding cash.

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2. Solid Chinese stocks or stocks in other economically stable places. And yes Chinese debt worries me.

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If you think the U.S. markets are feelings bubbly, do some due diligence on China's equities right now and you'll understand what a real bubble is.

I stay worried but would never have sold all my stocks and gone to all cash. First off there are few things more frightening than paper dollars with our federal government's debt load and out of control deficit spending. But more frightening than even the dollar are Chinese, Russian and Greek stocks.

I suggest hiring a certified financial planner you have confidence in after a serious interview process. I have enjoyed your posts and know you are a smart guy but you need a pro handling your investments if you are prone to selling everything and going to all cash because you are worried.

Think long term and along these lines:
Global Blue chip dividend paying stocks in the greatest companies in the world
Growth stocks
A nice home
Oil and gas royalties
Rental properties
A little gold
Cash

Lead. Brass. Lowers. Uppers. Puts. Covered calls.

Way too early for a major sell off (20%+) imo. Still years away.

Just thoughts here, not providing any sort of official advice here. Seek out a professional.

Equities

I'd put it in this order;

1. Japanese Equity Market. Only major market that is still trading 50% below its previous high.............That's solid.
2. Europe - good stuff so far this year and I don't think they're done yet. With uncertainty not going away (Greece), The Quantitative Easing should continue from EU (it's U.S. All over again)
3. U.S. - Growth Stocks over Value.

Fixed income

You've got to be concerned with interest rates rising eventually... What will rising rates do to your bonds/bond Funds? Bad things. Something to consider.

Look to Specialized Investments to diversify away from some of the more prominent risks out there which are:

- Equity Markets are near all time highs
- The markets are more highly correlated than ever due to technology and globalization. Lowly correlated strategies are the only true diversifiers (you may think you are diversified by owning s bunch of different ETFs and Indexes, but look at the correlations...Not that those are bad, just not the only piece of diversification).
- Interest rates rising will negatively impact fixed income prices


Look for strategies that can get you yields and diversify away from these risks...
- Owning Senior Secured Loans within CLOs are a great strategy that achieves this goal across the board. (ECC) (OXCL)
- GloboMacro strategies are also an excellent diversifier right now too. (IGMLX)

The greatest single correlating factor to investment success across all wealth managers is diversification.

And ultimately, hire a fiduciary Registered Invesment Advisor to manage your money for you. If you have a full-time job, you should leave it to a professional you trust that aligns your interests first handling your money.

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I stay worried but would never have sold all my stocks and gone to all cash. First off there are few things more frightening than paper dollars with our federal government's debt load and out of control deficit spending. But more frightening than even the dollar are Chinese, Russian and Greek stocks.

I suggest hiring a certified financial planner you have confidence in after a serious interview process. I have enjoyed your posts and know you are a smart guy but you need a pro handling your investments if you are prone to selling everything and going to all cash because you are worried.

Think long term and along these lines:
Global Blue chip dividend paying stocks in the greatest companies in the world
Growth stocks
A nice home
Oil and gas royalties
Rental properties
A little gold
Cash

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Interesting and thanks . Right now my asset base is 75% real estate and 25% cash. I like the idea of global blue chip dividend paying stocks. As far as gold goes I Just need to learn the best/safest way to buy it.

BTW Yes I am nervous about being all cash with the exception of the real estate.

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Way too early for a major sell off (20%+) imo. Still years away.

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Please if you do not mind explain why you feel this way. We are 7 years into this market expansion. This is about the average for a post WW2 run up. What do you see differently here ?

Appreciate the thought folks !! I am sure many feel as I do and also appreciate the discussion.

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Way too early for a major sell off (20%+) imo. Still years away.

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Please if you do not mind explain why you feel this way. We are 7 years into this market expansion. This is about the average for a post WW2 run up. What do you see differently here ?

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This expansion is nothing like the prior expansions. The fed and the gov't and worldwide central banks have a lot more control of the economy now. We are on a whole different track than the first 232 years of our countrys' existence. I don't see the policy makers letting this economy run into the ditch until it is unavoidable. And when that time comes (say in 10 years or so) then it won't be a ditch, it will be a canyon.

Jeff, your analysis makes more sense to me than any other I have heard.

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Jeff, your analysis makes more sense to me than any other I have heard.

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You might want to see a doctor and get a prescription for that.

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Way too early for a major sell off (20%+) imo. Still years away.

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Please if you do not mind explain why you feel this way. We are 7 years into this market expansion. This is about the average for a post WW2 run up. What do you see differently here ?

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This expansion is nothing like the prior expansions. The fed and the gov't and worldwide central banks have a lot more control of the economy now. We are on a whole different track than the first 232 years of our countrys' existence. I don't see the policy makers letting this economy run into the ditch until it is unavoidable. And when that time comes (say in 10 years or so) then it won't be a ditch, it will be a canyon.

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Interesting. With all due respect I disagree with your time table but who knows. I do agree with you in principle. I think you may have more faith in the policy makers than I do. They are still running the Maynard Keynes playbook its just full bore.

A couple of alternatives to consider:

1. Investing in private companies in your area. 1-3 year loans with equity kickers for early to mid stage companies. Should have a local angel investor group of university incubator that is a great source for these types of deals. Downside is you have to look at a lot to find a few but the upside is potentially nice if you don't mind the risk.

2. Go to local title company and offer to bridge short sales or situations where concurrent closings end up being delayed by a couple of days. Have the security of real estate backing it and make a few points on each deal inclusive of interest and fees. Focus on smaller deals. Wouldn't do if you are not familiar with real estate but sounds like you are.

3. Find a remodel entrepreneur type and back them for flipping. Would definitely stick to lower priced homes to start.

Not offering any advice (call Stive or one of the others on here), just offering suggestions to explore.

good post, Jake.

A second on Jake's post. I've been hearing similar things from other people I trust.

That point on company overvaluation due to buybacks is something I keep hearing repeatedly. I'll be moving my money into less aggressive locations in the very near future.

I'm going to have to come back and read Jake's post when I have a few minutes. IMO, our economists were so preoccupied with whether or not they could that they didn't stop to think if they should, and now they're using all that expertise to keep digging, to keep accumulating risk and instability globally. I think all four of these are going to shatter unless we find a way to let the air out gradually.

1. China. They are doing all sorts of screwy stuff to prop up their economic status, and eventually it's all going to come down.
2. Eurozone. Greece is the tip of the iceberg over there. Eventually Germany won't be able to hold it together. A tremor could bring down 3-4 major economies at once and cause defaults in the trillions.
3. US currency. We're dumping money into the economy and keeping interest rates flatlined which has the stock market blowing up but I think it's a lot more inflationary than CPI shows. I also think it has allowed us to soak up a lot of the international export surplus which is keeping countries like China afloat... for now.
4. Social security and various medical systems that we can't afford. Eventually the economy is going to realize that this set of liabilities is stupid optimistic and doesn't make any sense any more. They only way out is hyper inflation, and once the dollar starts showing the strain everyone internationally is going to dump the dollar and we'll be papering our walls with it.


The trigger may be something completely different, but I think all of these are very fragile situations right now. The only way out, IMO, is if China sticks the landing on letting the renminbi float. Their exports will suffer, but quite frankly no one can truly afford them right now anyway. Anyway, if China can turn into a major consumer/buyer with a floating currency and India does the same, we may be able to collectively grow out of this thing unscathed. I still think US currency is going to get hammered eventually though.

For a total rookie when it comes to global economies, I've got a dumb question.

What's the point of keeping track on international debt? We owe trillions. What happens if someone calls our debt? They stop trading with us? Do we just start getting blocked off from the rest of the world?

Is it foreign private banks loaning to the US or other governments?

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I don't give them that much time either. It is evident now that the Fed really just panders to the stock market now. Any 10%+ correction and they will freak out and reverse course on raising rates and probably restart QE again. They are so freaked out by the stock market declines in 01 and 08 that they will do anything to avoid them. Problem is they are going to do the same thing as always and create massive bubbles. You can't manage monetary policy to avoid recessions, they are inevitable and healthy for the long term business cycle. It like the Fed is the Wizard of Oz behind the curtain. This will end in tears.

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My suggestion is you understand the difference in our past economic cycles and this one that started in 2008. QE was not used in this fashion prior to 2008. This changes the timing of the cycle as this allows the central banks to lengthen the "expansion". I quoted expansion because this one is more of an illusion than past expansions.

The central banks, as you put it will freak out and push monetary policy far beyond what policy has ever been pushed before trying to avoid the downturn. And with QE they can push it much longer then most everyone thinks because Yall are using prior history to guide you. I see this going until a currency reorganization is needed. And that won't happen until worldwide govt debt is unsustainable even with central banks "buying" it. I quoted buying because it could be indirect buying as well as direct buying. And this event only becomes unsustainable due to inflation running rampant due to massive QE. Inflation isn't anywhere close to the levels that will signal the downturn. And by downturn mean currency devaluation. Where the banks shutdown for a few days and then reissue dollars that overnight devalues everyone's wealth.

Someone else will do a better job explaining because I'm just now getting into this kind of thing. However, my understanding is that when the US government wants to spend money (for instance, on medical programs, social security, or defense) but does not have a positive account balance, they can do that by going into debt.

The government goes into debt by basically selling an IOU (in the form of a T-bill, bond, TIPS, etc) to a third party. The IOU is backed by the full faith and credit of the US Government that the government will pay back that IOU with real dollars, raised through taxes, that are worth about as much as the dollar was when they sold the bill. When people think that the dollar will be worth less, the government will have to promise a higher interest rate for the IOU to sell so that the buyer still believes he or she will get the money back.

The reason that the government doesn't just issue the IOU directly to the entity it is trying to pay is that you can't pay workers or buy supplies in T-bills. The reason the government doesn't print new money to pay bills is that that will cause inflation which is bad for the economy past a certain point; economist believe that "optimal" inflation is around 2.5% per year.

The elephant in the room is that the US is the world's reserve currency. A reserve currency is the currency that other countries hold to ensure that they can participate in markets. It is assumed to be stable and nearly universally accepted. Other currencies, most notably the Euro, are used as reserve currencies, but the US dollar accounts for 60% of reserve currencies.

Why is that bad? It means that it's not just the US who is interested in propping up the dollar. Trillions of dollars are held around the world in US dollars and IOUs. No one wants the value of their holdings to decrease and everyone is holding dollars, so the whole world has a stake in postponing a crisis. IMO, this is a factor in why we aren't seeing more inflation already due to QE and flat interest rates.

In theory, people would have a variety of options for reserve currencies, so that when one reserve currency is handled poorly by its issuer, holdings flow gradually to other reserve currencies, devaluing the initial reserve currency and sending a signal to the issuer to straighten up and stop screwing around.

However, when 60% of holdings are in USD and the major alternative is the Euro which has its own problems, everyone is stuck with the dollar, which is why China and others buy all that debt to help us keep going. Sounds ok, except that what this means is that the dollar is now a huge store for risk, so that if it does go, it's going to go all at once and screw the whole world over.

I don't think our politicians understand that; they think the dollar being strong is just a thing that is, so they keep the pedal to the metal not realizing that eventually the rest of the world won't be able to absorb our bad habits.

US dollar bubble? Yikes.

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For a total rookie when it comes to global economies, I've got a dumb question.

What's the point of keeping track on international debt? We owe trillions. What happens if someone calls our debt? They stop trading with us? Do we just start getting blocked off from the rest of the world?

Is it foreign private banks loaning to the US or other governments?

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Thats okay buddy I think most of us have "dumb questions". Here is something to ponder.

You may first see trouble at US bond auctions, a common tool used to raise cash via debt. Here is a link that explains things.


As faith or confidence in the US ability to service its debt gets questionable demand for t-bills may go down UNLESS they raise the rates paid to t-bill buyers in order to spur demand. In this case the cost of borrowing goes up. Spain and Italy both had to raise bond rates to 6.5 + percent, a rate that is almost suicidal, last year. 2 to 3% depending on maturation dates is common. Many are owned by people outside the US. It is in their interest that the US remain stable to service and repay these t-bills. In theory. Personally, I would not touch these despite the fact the US has paid back every penny so far but then again we have never had debt loads like we have today. These are one of several canaries in the coal mine.

Oops I missed Ulrich's post above. Its a good one.