Securities for the Economy’s New World Order

Posted on March 15th, 2009 by admin in How to Invest

Situation

In the fall of 2008, the political, economic, business and investing worlds as we knew them changed forever. It happened when Hank Paulson dramatically announced the emergent need for what became the Troubled Asset Relief Program (TARP),

We no longer can choose stock or bond investments based primarily on company, sector or even macro economy understandings. Those understandings are being seriously challenged by events. Every economic or business issue sustains major argument, and of course politics strides over reality, whether correctly perceived or not. The root of this excessive contentiousness is the catastrophic state of the banking system, which state drives more uncertainty than usual in the economic system.

Now, in self defense, we strive to understand the effects of pure fear permeating the market participants, regulators and politicians.

The fear, lack of basic understanding of what to do to “stabilize” the banking system, and ongoing political interventions and power grabs all combine to form a toxic stew. Our economy, businesses and markets now operate in a New World Order (NWO), politically driven, whose true nature is only dimly emerging. But those who see through the haze can profit from NWO and defend their futures from its likely depredations. We will try to enlighten the quest.

What Can we Dimly See?

In the movie “Master and Commander”, one of the early scenes shows glimpses of a feared battleship emerging from the mist, with the watchman on the good guys’ ship straining to discern the threat to warn his crewmates. The watchman isn’t sure but he’s very afraid. Finally, the Master looks through the telescope and instantly sees the rapidly emerging enemy ship. We are the watchman, but unfortunately we cannot claim to be the Master!

What we see are some really large facts:

  • On the demand side, huge job losses and fear drive consumer demand lower, and fear-drives savings increases.
  • Production and sales outlooks have naturally been reduced to levels more closely matched to perceived lower consumer demand.
  • Government prints of trillions of dollars for a variety of “bailouts” and guarantees to save the banking system, even as the policy      within which government operates is not articulated.
  • Political shock and awe lead to massive additional “stimulus” spending to increase government control of the economy through bureaucratic and regulatory action and through financial support to institutions, such as unions, that help the current regime keep power.

Likely Macro Results

The short term demand reduction is keeping prices down and helping to absorb the massive spending. Thus there are deflationary forces at work. However, the massive cash bolus into the banking system will eventually work its way out into the economy and start inflationary pressure, which usually results from too much money relative to the amount of goods out there. While inflation seems unlikely to spring forth soon, it probably will emerge in roughly two years.

How to Profit?

Here is a collection of securities chosen to profit from this NWO. The operating theme is that the NWO will be a deflationary economy transitioning to an inflationary one, with regulatory burdens increasing with unclear effectiveness on risk reduction.

The collection isn’t a portfolio since we wouldn’t own all of these securities. Rather, these instruments serve various purposes quite pertinent to our beliefs about the future. Also, we aim to test ideas.

We chose seven broad categories of instrument, and by no means do we claim these are all inclusive. Rather, they are particularly pertinent for aspects of the NWO that matter.

  • Fixed Income Securities-Buy long
  • Fixed Income Securities-buy bond proxies with ROI designed to respond short
  • Equities – buy Long
  • Equities – buy proxies for Short
  • Long equities in sectors favored by OBAMA’s stimulus package (health care, clean energy, infrastructure)
  • Inflation and currency hedges (gold and dollar/euro exchange rate)
  • Jim Cramer’s “survival” portfolio (This designed by the CNBC entertainer and market maven as his idea of an equity portfolio that   gains even during a severe recession)

Given the list of 21 asset classes shown below for these categories (click on the thumbnail), we computed the annualized ROI and annualized standard deviation of daily ROI for each security. We also computed the cross-correlation among all the securities and show all these measurements in the matrix (click on the thumbnail for the matrix).  Naturally, based on these correlations we provide our Portfolio Diversification X-Ray (PDX) that tracks the amount of diversification in this particular combination.

Description of NWO Assets

Description of NWO Assets

PDX of NWO Collection

Matrix of NWO Collection

We’ll focus on a few specific observations and leave the rest to you, dear reader.

This combination had a low value of PDX of 9% based on the measured 45 day period ending 3-13-09. So this is an undiversified combination, but that’s OK as long as it’s not your portfolio!

Notice that Cramer’s set of five stocks had very poor ROI and very high volatilities, and were also highly undiversified. The exception was AEM, the gold mining firm, which is very uncorrelated from his other four choices, and had a positive but highly volatile return.

On the other hand, RRPIX, RYJUX, TBT were all very big winners but also quite volatile. (Note: S&P500 index ^GSPC  “normally” has volatility of about 20%, so we call anything over 30% high for any security). These ETFs are quite interesting for our approach to making money in the NWO and we’ll pay attention to them as we track this NWO combination going forward.

We then compute the ROI and standard deviation of ROI for weach of these securities, based on the trailing 45 business days ending 3-13-09. Of course we compute the PDX for the matrix as well as the ROI and STD of the whole set. You can see the matrix and the individual performace by clicking on this thumbnail.


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