December 16, 2011

2011 Year-End Update

Janet Briaud, CFP®

The world stock markets are moving up and down like a yoyo daily. Investors everywhere are frustrated or plain scared. In the midst of uncertainty, there is good news. Your portfolio performed very well this year. We expect, however, that next year will continue to be a challenging economic environment, but even in these fluctuating times, investors can always find sound investment opportunities. I will outline some below.

Investments This Year

Despite the wild swings in the market, several of the investments you own have done very well, especially the 30 year Treasury bonds, which are up over 25%. In addition, gold bullion is up 10% and tax-free bonds are up over 5%. We sold 50% of our Treasury bond allocation to take profits and moved that money to cash. We currently have a large cash position, which helped preserve your capital because global stock markets were negative. Some markets were down more than 15%: Brazil (-23%), China (-17%), France (-19%) and Germany (-16%). Interestingly, the US stock market performed the best: -3.5% year to date.

Challenging Economic Environment

We believe that this period, which began in 2007, is similar to the depression of the 1930s. For decades we have increased our debt load; now we are in the process of decreasing debt, known as deleveraging. This deleveraging is occurring at government, family and business levels. For example, the problems in Europe resulted from too much debt for the given level of income. When investors become concerned with high levels of debt, they want to be paid more interest for the increased risk. With higher interest payments, the income does not cover the debt payments; therefore, the risk of default increases. This situation makes investors even more concerned, so they require an even higher interest rate. This vicious cycle will ultimately end with bonds defaulting and investors in those bonds losing part or all of their investment.

Deleveraging usually lasts a decade or longer, during which time much wealth is lost. Already trillions have been lost; home values nationwide are down by 33% from the high; the US stock market is down by 25% and international markets are down even more. Investing in this environment is challenging, but we are committed to finding investment opportunities where others do not. 

Investing

In deleveraging cash is king. You might argue that holding cash is not earning anything, but it is far better than losing value. Let’s say you put your cash in a non-interest bearing account in 2007. Today you can buy a house for 33% cheaper on average than in 2007, so your money is worth more today. You can buy US stocks for about 25% cheaper, so again you are better off. We have a large amount of cash in your portfolio because we believe that there will be some great investment bargains in the near future, and we plan to take advantage of those bargains.

We expect a recession in the first half of 2012. Historically, one of the few investments that have done well in a recession is Treasury bonds. We expect Treasury bonds to perform better than most other investments, at least through the first half of 2012. We anticipate selling the remainder of our Treasury bonds sometime next year.

Gold bullion should continue to appreciate as Europeans move assets out of their banks and Asians continue to buy gold for an investment and for jewelry. Although prices will fluctuate, we should have an opportunity to add gold at lower prices.

Historically, a deleveraging environment is terrible for real estate and stocks. For example, in Japan during the past two decades and in the US during the 1930s, the stock market dropped more than 80%. We do not expect the markets to drop that drastically, but we do expect a similar environment to 2008—2009 with stocks dropping as much as 50%. We have little or no money invested in these assets. However, we have a small allocation to Hussman Strategic Growth, which has historically done well in down markets and is up about 4% year to date—about 7% better than the US stock market. We anticipated selling Hussman this year, but we will wait a few months as the downturn plays out.

All of us at Briaud are focused on you, our clients. Our goals are to be proactive and to think clearly so we can give you peace of mind and positive returns regardless of the US or world economy. In every economic environment, there are investment opportunities. Our job is to find them.

We are filled with gratitude to work with outstanding clients, like you. We wish you the very best this holiday season and throughout 2012.