Chinese Market Tops 5,000

I hate to sound like a broken record on this subject (even though most of us don’t use records anymore), but the Chinese stock market is in a major bubble.

The real estate market has been in a massive bubble too, and for longer than I could have imagined.  For that reason, I am hesitant to call for an imminent downturn in Chinese stocks, especially since it is impossible to time these events anyway.  But I do foresee a major Chinese crash, whether it is in a week or a year from now.

I would be really shocked if these two bubbles both last for another two years or more.  The only way I could see this happening is if the Chinese central bank pumps even more money into the system at a greater pace than it already has.

The real estate market in China has seemed to cool a bit, but nothing close to a crash yet.  Meanwhile, the Chinese people have found themselves in the midst of a second bubble, whether they know it or not.

The Shanghai Composite Index just went over the 5,000 mark.  For some context, the 52-week low is barely over 2,000.  When a somewhat major stock market index goes up over 150% in less than a year, you know it is a bubble.  You know it is unsustainable.

This isn’t a post about shorting Chinese stocks, although that is certainly a possibility.  This is about the ramifications for the U.S. economy.

American consumers rely quite a bit on Chinese products, but there is more of a connection than this alone.  If there is a major recession in China, it would be hard to believe that this would not have some harmful effects on the U.S. economy.

The U.S. economy has its own misallocations.  U.S. stocks are likely in a bubble from the previous easy money policies of the Fed.  I don’t think real estate is in a nationwide bubble in the U.S., but certain areas such as Silicon Valley in California are likely in housing bubbles.

When Chinese stocks finally go into free fall, then don’t be surprised if U.S. stocks initially follow suit.  The bigger question mark is if U.S. stocks will just have a correction or a new bear market.

Watch China.  It is going to get interesting.

A Permanent Portfolio for Defense

I am a strong advocate for having a permanent portfolio as part of your investment portfolio.  I recommend anywhere from 50 to 100 percent of your financial assets be put in a permanent portfolio setup.  This wouldn’t include any investment real estate.

The permanent portfolio was described by Harry Browne in his book Fail-Safe Investing.  You divide your portfolio up into 4 sections as follows:

  • 25% stocks
  • 25% long-term government bonds
  • 25% cash or cash equivalents
  • 25% gold

This portfolio is meant to weather any storm.  If there is an environment of high inflation, depression, or prosperity, then at least one category should pull up the rest.  Over time, you will find that it results in positive returns, especially with rebalancing.

The one environment where it tends not to do too well is when you have a recession or low growth, coupled with no or low price inflation.  In other words, the environment we have been in for the last 7 years is about the worst environment there is for the permanent portfolio, barring some major catastrophe.

While monetary inflation has been extremely high since 2008, price inflation has been low.  Gold has not done too well over the last few years and interest rates are extremely low.  You don’t get the dividends off of your cash and bond investments as you normally would.

This is why the permanent portfolio has been lackluster over the last several years.  It was great to have during the fall of 2008.  Although it went down briefly, it was far better than owning stocks, at least up until spring of 2009.

An alternative to the permanent portfolio setup is buying the Permanent Portfolio mutual fund.  The symbol is PRPFX.  I prefer the actual permanent portfolio, but PRPFX is easier to accomplish quickly.  And for people with 401k plans, sometimes it is a possibility.

I say that I recommend anywhere from 50 to 100 percent of your financial assets be put in some kind of permanent portfolio setup.  That is a big range.  Part of it depends on your appetite for risk.  If you are really risk averse, at least with your investments, then you should be closer to 100%.

Right now, I actually recommend that you be well above the 50% level.  The reason is that no investments look really appetizing right now.  If you know of a great stock that you think is going higher, or if you live in a town with cheap real estate that you think is going higher, then go for it.  But personally, I just don’t see a lot of opportunities right now in the things that I know well.

I think gold is going to see another bull run at some time, and I think that gold stocks are going to go up in a big way.  That is why I own some gold stocks now, in case things happen sooner than I expect.

But even with gold and gold stocks, I wouldn’t be surprised to see another downturn before things turn around.  If we hit another recession, then everything may take a temporary hit.

One mistake that many investors make is that they feel they always need to be in the game.  They feel they always need to be invested in something big.  But sometimes patience pays off, and I think patience is important right now.

There is nothing wrong with having most of your assets in a permanent portfolio, making minimal returns above the price inflation rate.

When a big event happens, you can get more aggressive.  It is better to wait for an opportunity that is more obvious.

For example, if the economy starts in a downturn and the Fed starts talking about another round of quantitative easing (monetary inflation), then I will probably start getting more into speculating in gold and gold stocks, outside of the permanent portfolio.  This is just one example.

Do not expect things to keep on going as they are.  The Fed has built up a lot of malinvestment.  Either the economy is going to get really rocky at some point, or the Fed is going to have to up the ante with more inflation.  It won’t be the status quo forever.

In the meantime, don’t be afraid to sit back and bide your time.  Opportunities will arise.  For now, I recommend that most of your assets be kept safe – or at least as safe a way that I know of – in a permanent portfolio.

Has the NSA Stopped Spying?

A key section of the so-called Patriot Act has expired that was previously used as the basis for NSA spying.  I read the many headlines saying that you can now email, text, etc. without fear of the U.S. government spying on you.

But has the NSA really stopped spying?

Virtually everything the NSA does is unconstitutional, so in regards to the law, it doesn’t really mean much.  Is anyone really so naive as to think that the NSA workers just went to work on Monday morning and found something else to do with their time?  They shut down the computers and databases used to collect information and went on to something else?

The whole reason that Edward Snowden is living in Russia is because he blew the whistle on the NSA.  He proved to the world that the NSA was spying on almost anyone it wanted to, including Americans.  He proved that the NSA was not in the business of just catching terrorists, but in the business of mass data collection.

The NSA spies.  That is its purpose.  It is for more power and control for the state against the general population.

The law means nothing to the people at the NSA.  If it did, it never would have started spying in the first place.  It was already illegal, with or without the Patriot Act.  It will just use other provisions of the Patriot Act to justify its actions, if it even needs to justify its actions.  If the whole Patriot Act is repealed, it will find some other justification if needed.

The only way to stop NSA spying is by defunding the agency.  When the NSA workers stop getting their direct deposits, then they will not want to show up for work any longer.  They might have to find an honest job.  The funding has to stop for any guarantee that the spying will stop.

It is good that this latest story happened because it brought more awareness to the American people.  But it is highly doubtful that it has stopped, or even slowed down, the NSA spying.