Asset recommendations for the downturn

[dwoodman1]

Based on the overarching concept of a long term economic downturn as a result of demographics, what asset class investments would the forum recommend?
Any suggestions greatly appreciated by a relatively new player to the market.

[Laxmaan70]

For now you should be in cash, not equities. Also, if you are in a position to sell real estate now is a good time to sell before the final wave down into 2012. The time may come when bond yields may spike, then you may want to enter bonds. The same goes for stocks, after the stock market reaches the bottom it will prove a great buying opportunity. No rush though, remember it took several years to reach the bottom after the 1929 crash. It's very likely we have a final wave down in stocks.

[razorthin]

I suppose that in such a deflationary spiral as Mr. Dent believes is coming, CASH is king - or you might short equities or purchase an inverse etf. But man, the way they are pumping this market now it is sooo hard to sit on your hands!

[zetroc]

I'm curious about holding cash too. Mr. Dent mentioned in his book that cash is king in this deflationary period. But since so much cash is being printed out of thin air and injected into the system, does he/anyone still think cash is the best asset to hold? Are we not better off to hold gold as a hedge against it? Any light on this would be helpful.

[jpmacoli]

While some "fear factor" may result in Gold falling less in the coming deflationary age, all commodities will fall in price.
Despite all the reckless stimulus spending we are seeing, it won't match the tens of trillions lost in asset values in real estate alone, and I believe that is why a period of deflation is inevitable.

[kingches]

Dent's newsletters have some charts which help explain why cash is king. We are going through a massive deleveraging process. Basically there was and continues to be so much leverage in the system, that by comparison the government stimulus is just a drop in the bucket.

A brief explanation on leverage is that when you deposit $10,000 in a bank, that bank can now lend out 10:1 on the deposit, or $100,000. Say you buy a house using a $100,000 mortgage, the seller ends up depositing $100,000. That bank in aggregate can loan out $1,000,000. A business now takes out a $1,000,000 loan for new equipment. The equipment manufacturer deposits that money in their bank. That bank can now loan out $10,000,000 to a someone else. And on and on.

Where did all the extra money come from? The federal reserve created it out of thin air.

If businesses and individuals decrease their rate of buying things on credit, then the whole leveraging process works in reverse. Dent's demographic theories predict when consumers on average will decrease spending.

In which scenarios does it make sense to buy gold as a hedge?
#1 If our government ends up printing more money than we lose through deleveraging, then we could end up like the Wiemar Republic or Zimbabwe.
#2 China decides to cripple the United States by selling all of their US treasuries causing the dollar to fall.
#3 You tell me?

If you are interested in learning more about leverage and currencies, I'd recommend reading "What has government done to our money" by Murray N. Rothbard.

[ga7pilot]

I am about to take a 20% short position in my IRA. However, in my 401k, shorting is not allowed. So, I am planning to purchase a U.S. Treasury Long Bond mutual fund as a deflationary hedge. I am assuming that rates on treasuries will come down, or at least not rise. It seemed to work after the 2008 crash. I plan to stay away from corporates and municipals because those rates should rise as a declining economy increases the default risk on them. Of course this assumes that the default risk of U.S. Treasuries is not called into question anytime soon.

I would appreciate any thoughts on this strategy.

[dcoplin]

Here is an interesting articel from MSN.com today...

http://articles.moneycentral.msn.com/In ... tdown.aspx

[burner]

ga7pilot -

In Dent's book he recommends investing in Corporate and Municipal bonds during the big stock market crash (the end of 2008 was the pre-game show) when spreads get very wide. Also, yields on US government bonds should drop as investors flee to safety again.

Andrew

[ken runions]

Would opening a U.S. dollar account and leveraging the home line of credit for U.S. cash insulate a person during the deflationary downturn?
In Canada here the TSX is heavily weighted with commoditys. Our dollar is continuously turning down against the U.S. dollar when the market corrects down.
Smart play?