Coup d’Etat
March 12, 2011
The Undead Are Rising!!!
March 31, 2011


North Africa is smoldering, Japan just got soaked by a tidal wave and a radioactive debris cloud may or may not suddenly appear. The PIIGS continue their slow financial collapse and QE II will end in a few months. The world we live in is a crazy place. On Sunday night, I watched in awe as the Japanese stock market lost nearly 10% in just a few minutes. That capped off a nearly 20% decline in two days. I have been following the markets for a long time. I cannot remember a time with so many cross currents and so much uncertainty. All I can say is “WOW!”

I’ve received dozens of emails about what to do. Just because the world is engulfed in chaos, that doesn’t mean that you HAVE to do something. In most cases when investing, the best thing you can do is to be patient and do nothing. Panicking is rarely the correct move. Throughout history, if you bought good businesses at reasonable prices, you made a lot of money. I see nothing that changes those rules. Of course, some businesses have been irrevocably changed by recent events. Most businesses are relatively unaffected. Ask yourself if you businesses have been impacted. If not, there’s no reason to act.

When markets become volatile, I ask myself a few questions;

  1. Am I using any margin anywhere? If so, I need to get liquid immediately. Irrational markets can rapidly become more irrational. Margin = Death.
  2. Are there illiquid assets that I should sell before liquidity potentially disappears?
  3. Is there something that I have wanted to sell but haven’t because I wanted a better price? If so, should I just take today’s price so that I have more cash to buy something better when the bargains show up?
  4. Where are bargains being created? What scale do I want to use when averaging in? Do I have my wish list adequately researched so I can pounce when the prices are right?
  5. Do I fully understand the reason for the panic selling? Should I be more or less concerned than I currently am?
  6. What do I own that is being impacted by current events? Should I be concerned that the business could be permanently impaired?
  7. Have I spoken with my CEOs lately? Do they adequately understand the crisis and the opportunities created by it?

I realize that these are common sense questions to ask, but I like to sit down and go through the whole portfolio. I need to make sure that I have asked myself these questions.

Next, I try to figure out what it all means. The world is in chaos. Everywhere I look, the solution is money printing. Americans always wonder why Japanese citizens will accept such low interest rates, but they ignore the fact that a rising yen gives people a lot of purchasing power which offsets negligible interest rates. Japanese exporters may be hamstrung by a Yen under 80, but savers are quite happy.

For the past few months, I have been very worried about what would happen when QE II ends. We all know that Bernanke doesn’t want to stop printing money, but the public sentiment has turned against him. Will he use this earthquake as an excuse to continue his printing? Could this be a change of fortune for the Fed?

The Japanese have been very hesitant to print money. The majority of their debt is owned by their citizens. It’s politically unpopular to destroy the currency. I think that the Bank of Japan will use the earthquake as an excuse to get out ahead of the coming debt crisis in Japan and monetize significant quantities of that debt. When inflation does show up, they can just blame the earthquake and escape the blame.

A week ago, I was scared that when QE II ends this summer, the asset markets could have a real setback. I’m increasingly thinking that as investors, we have carte blanche to buy risk assets. Everyone wants to print money. It’s good for politicians. A bit of inflation makes everyone feel good. Politicians can now hide behind a humanitarian desire to help Japan recover. If a few asset bubbles are created by this, no one seems worried. The Fed itself has declared its intention to create an asset bubble big enough to bail out the housing bubble which incidentally bailed out the tech bubble. Could this earthquake be the excuse that everyone needs?

Where are the bargains today? I’m tempted to own Japanese equities that have been sold down too far. I’d bet that a few months from now, the Nikkei is higher than where it is today. Large cap gold mining shares have recently dropped significantly—they were cheap before this collapse, they’re cheaper now. Some of them represent excellent value from these prices. Agricultural commodities have been run over with liquidations. Rubber is down 35% in a month—is it cheap enough? What about rough rice? Find what’s down and keep asking yourself the same questions.

TOCOM Rubber Chart

At the same time, if something is up, maybe you want to sell it. I’ve been leaning long Yen (on and off) for years now. I’ve finally sold the last of it. Over 80 simply seems too high.

What happens tomorrow or next week? I have no idea. Be flexible, be liquid, ignore leverage and get a good list of companies you want to buy. Volatility creates opportunities to reposition your portfolio. Make sure you are in a position to take advantage of those opportunities—otherwise sell-offs will take advantage of you. No matter what and before you do anything, take a deep breath. Walk around the block. Think things through. Do not act out of fear or emotion. Lucid and level-headed decisions are good decisions. Now is not a time to panic and overreact.

Categories: Comments On Events
Positions Mentioned: none

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