Confession Time: The Predictions I Got Right and Wrong Last Year

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Posted by The Savvy Retiree on January 18, 2021 in Investing

Time to hold myself accountable…

Back in a letter to you in June, I explained my rationale for diving out of stocks. The pandemic was raging, the economy was sagging, unemployment was problematic, stimulus money supporting struggling families had an upcoming expiration date, and—perhaps most important—Wall Street was trading at irrational valuations.

As I wrote then: “I fear more than I ever have for the direction of Wall Street.” I sold almost all of my stocks, retaining a small, highly select group of companies (more on that in a moment). With my proceeds I moved into silver bullion, added to my already decent-sized holdings in gold, and I traded 75% of my U.S. dollars for Swiss francs. I also bought bitcoin and Etherium.

I concluded that dispatch by writing this: “Maybe I am wrong about all of this. Maybe this column will come back to bite me when the Wall Street balloon floats ever higher from here.”

So, now that we are into a new year, and we can look back over the last seven months, how did that call shake out?

Well, at time of writing, gold is up about 11.4% since my trade in mid-June. Silver is up 57%. The Swiss franc is up about 9% against the U.S. dollar (meaning my dollar-based purchasing power is up). Bitcoin is up 237%. Etherium is up 357%.

As for stocks…well the S&P 500 is up, too—by 18%. So, I got that wrong.

But I am standing by that call and doubling down.

The S&P 500 is even more overvalued than it already was back in the summer. Consider this chart:

This is the Shiller P/E ratio going back to the 19th century. It’s basically an inflation-adjusted view of S&P 500 valuations. All you really need to take away from this chart is that stock prices are at levels that are never long for this world. A reckoning awaits.

What it will take to set that reckoning in motion—who knows? Investors can remain irrational for quite some time, as the last year has demonstrated. But I still refuse to play. As a screenwriter, I have a sneaking suspicion that I know how this movie ends.

The only stocks I own today (and they are tiny in number) are those with structural tailwinds, and almost all of them are healthcare, pharmaceutical, and gold/silver miners. I strategically added a tobacco stock recently because I was able to snap it up during a sell-off and grab a 10% annual dividend yield, and I am happy holding that, even in a market collapse, because people aren’t going to stop smoking, so the dividend income will keep flowing in. I’ve strategically added marijuana as well; the feds will legalize weed nationally and marijuana retailers, packaging firms, and branded product sellers are going to be big beneficiaries. And I’ve picked up shares in a crypto-currency bank, where the underlying value of the crypto the bank owns is actually more than the value of the stock itself. I like to exploit these kinds of mismatches.

Beyond that, I’m sticking to gold and silver, the Swiss franc, and cryptocurrency (February’s cover story of The Savvy Retiree is a Crypto 101 to help you learn all you need to know about owing digital currencies).

Too much is still much too wrong with the U.S. and global economies.

I continue to worry about persistently high unemployment and what appears to be a pending wave of bankruptcies and evictions that will hurt consumers and businesses. I worry Congress is doing much too little, much too late to aid American families. I worry about the incessant money printing and inflation that is now running at 2.3% on an annualized basis (I expect it will more than double from here).

And I worry that one of those events, or something else entirely, will serve as the pin to the S&P’s bubble. When that happens, the S&P will likely fall to its support level in the 2,300 range (a 37% decline). If the index breaches that level, then we’re likely looking at an 1,850 S&P, a 50% decline.

I’m particularly worried that the dollar is headed lower. The buck is already down about 13% since its peak last March, and I won’t be surprised to see it fall another 20% from here. I warn my American friends and they all yawn, failing to realize how a dollar in decline will drive up their cost of living. So be it.

Other nations are printing money, too, to fight the pandemic’s economic impacts, but the U.S. is outpacing the world. In the last year, the supply of dollars increased by nearly 25%. In the eurozone, the supply of euros is up by less than 9%. Currency is a game of relativity, and relatively speaking the euro is stronger, so the dollar will continue to weaken.

In all of this, precious metals will be the winner—crypto, too—because savvy investors want assets that can’t be replicated by magically printing more of them, as the U.S. does with dollars. In fact, I’m so concerned about the dollar that I’ve asked my employer to give me half my pay in euros so that I can preserve my spending power.

So, here at the end I will say this: I was largely right and partially wrong back in June. But the strategy I laid out remains my path forward. I want little exposure to stocks, sharply reduced exposure to the dollar, and I want to own the assets that are long-term winners of structural trends now in motion.

By Jeff D. Opdyke