The title of this article is of course borrowed from the brilliant book of the same name written in 1841 by Charles Mackay. The book deals with 3 “delusions”: "National Delusions", "Peculiar Follies", and "Philosophical Delusions". While dealing with The Crusades, alchemy, witch-hunts and other follies, the parts that interest us most today are the economic bubbles he discussed -- in 1841 -- and the national delusions he chronicled.
Mackay devoted a chapter each to the Dutch tulip mania of the early seventeenth century, the South Sea Company bubble of 1711–1720, and the Mississippi Company bubble of 1719–1720.
There are those who cannot imagine learning anything about today’s stock market from a book published nearly two centuries ago. It might seem particularly quaint, looking back from our worldly vantage point, that Mackay cited a contract to purchase one single tulip bulb in 1637: 160 bushels of wheat, 320 bushels of rye, 4 oxen, 8 pigs, 12 sheep, 126 gallons of wine, 1000 gallons of beer, 4000 pounds of butter, 1,000 pounds of cheese and some furniture, clothing and silver tossed in as a sweetener. Of course, such silliness couldn’t happen in our time.
After all, who today would exchange even part of this largesse for a few shares of a dot-com company with no revenue, no earnings, and no adult leadership, brought public solely to enrich Goldman Sachs (GS) and the other big underwriters and now mercifully sunk beneath the horizon of our memory? Oh, that’s right – millions begged their brokers to include them in the IPO to be “allowed’ to buy shares priced at hope times greed times infinity.
But we’ve learned our lesson since 1999, right? For instance, no one buying a house at a Price/Earnings Ratio of 11 in 2000 (P/E in this case referring to the purchase price divided by the rental income) would then be dumb enough to pay 34 times rental income just 5 years later, right? Oops. That’s just what they did in San Francisco, San Jose, Phoenix, Las Vegas, Miami and lots of other places.
To students of history, the dot.com.bom was predictable in character if not in time. As was the housing decline. Trees do not grow to the heavens except in fairy tales and calls from your full-commission broker.
In fact, markets are cyclical, not linear. That’s why I now recommend food; energy; basic resources; base, precious and rare earth metals; materials to build the infrastructure in emerging markets and repair the crumbling infrastructure in developed markets; and health care, because once our most basic survival needs have been met, we’d like to stick around and enjoy such things for awhile. I also maintain a few put options (or calls to buy inverse ETFs).
You can trust government to protect your wealth. Or you can trust that food, energy, basic materials, gold and silver, and health care will rise as the inevitable inflation which follows non-stop printing of money and the diverting of funds to bankers on Wall Street.
Which companies within these select sectors are best? Some people, despairing of adding value by tearing into balance sheets and actually understanding the businesses in which they are investing, have deferred to mutual funds and ETFs. If this is your approach, may I suggest index ETFs which cover each of these sectors. “Active management” along with active expenses have left most mutual funds at the post vis a vis their ETF counterparts.
If you are willing, however, to seek the exceptional individual company via hard research and independent thinking, may I suggest: to feed the world -- grains, crops, livestock, soil enrichers like potash, nitrogen and potassium, and efficient irrigation all top my list. Potash Corp (POT), Deere (DE), Israel Chemicals (ISCHY.PK), Yara Intl (YARIY.PK), Nestle (NSRGY.PK) and Lindsay Mfg (LNN) are among my favorites.
For energy, I choose natural gas first, nuclear next, and then solar, wind, biomass, oil and coal – every single one of them. In the developing world, coal and natural gas are most abundant and cheapest and will therefore be the first choice of most users. Here are just a few representative issues: Exxon Mobil (XOM), BP, Conoco Phillips (COP), Royal Dutch Shell (RDS.B), Williams Partners (WPZ), Magellan Midstream (MMP), Boardwalk (BWP), OneOK (OKS), Chesapeake (CHK), EnCana (ECA), Imperial Oil (IMO), Natural Resource Partners (NRP), Penn Virginia (PVR), and Cameco (CCJ.)
In health care, the revolution of health in the West has come from ethical drugs, non-invasive technology, prevention and early interventions. That’s the way to invest. I like the biggies here: Roche (RHHBY.PK), Johnson & Johnson (JNJ), Merck (MRK) and Pfizer (PFE) come to mind.
Among the metals and mining companies, I recommend for your consideration Goldcorp (GG), Yamana Gold (AUY), Freeport McMoRan (FCX), Silver Wheaton (SLW), BHP Billiton (BHP) and Franco Nevada (FNNVF.PK). I also believe the mining equipment providers will do well as the mining firms wear out old equipment and seek new. Joy Manufacturing (JOYG) and Major Drilling (MJDLF.PK) merit a look.
Why do I suggest gently removing money from financials, techs and others that have done well and into these sectors?
Because in the past 22 years, every crisis has been dealt with by huge injections of liquidity into the banks and Wall Street with interest rates cut, often to negative inflation-adjusted rates of return. Whether it was the crash of 1987, the Mexican Peso Crisis in 1994, the Asian Currency Crisis in 1997, the Long-Term Capital Management bankruptcy in 1998, the dot-com bubble in 2000, or most recently the U.S. housing bubble, each crisis was dealt with by transferring money from honest taxpayers to reckless risk-takers who knew they would always be bailed out.
There is no such thing as easy money. Not in the long term. Yet that is what the Fed has been providing – easy short term money -- every time it looks as if we may have a normal contraction. And as long as we maintain such delusions, no matter how popular, we will continue to be subjected to bouts of madness in the markets.
Rather than allow occasional recessions and bear markets to rid us of the excesses of artificially-created bubbles, the Fed was the pusher to the junkies who needed just one more injection to get whole again.
As a result, we may now risk a double-dip recession. If the Fed manages to walk the tightrope they’ve set for themselves, it will be the first time in US history that runaway growth in money and credit has not been followed by a declining dollar and rising inflation.
Don’t get me wrong. I’ll enjoy the good times as much as everyone else -- I’m just making sure that while I party, I do so near the fire exits…
Full Disclosure: Long POT, YARIY, NSRGY, RDS.B, WPZ, MMP, BWP, OKS, CHK, ECA, IMO, NRP, PVR, RHHBY, JNJ, GG, AUY, FNNNVF, MJDLF.
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