The headline risk here, folks, is that if you wait for your central banker to give you insight into ...
Ten Ways to Survive a Zombie Economy
10/26/2010 9:34 am EST
Investors face a host of potential horrors, including looming debt, currency disasters, and water wars. Here's how to face down the scary monsters and still make money.
Woody Harrelson never stops killing zombies in "Zombieland" to ask, "Should I buy more inflation-protected Treasurys?" With the zombies at the door, at the windows, in the car…it would be a silly question.
But it's exactly the kind of question investors must ask. We may think the zombies are coming—in the form of the US debt, a global demographic wave of aging that will soak up savings, a crashing dollar, global water wars, or something else. But they aren't here yet, we don't know when they might arrive, and we can't be certain they will show up at all.
Cowering in a bowling alley, counting our bullets, and waiting for the first hand of decaying flesh to poke through a window isn't an option.
But what is? How do we prepare for the attack of the zombies when we don't know when, or even if, it will happen?
Ten Ways to Brave the Horrors
Let me give you ten ideas for balancing the need to make money in the market in the near term with providing zombie protection in the long term:
- Don't deny your fears. In zombie movies—in fact, in virtually all horror movies—there are signs that bad things are about to happen. The family dog disappears. Birds mass on the telephone wires outside the school. The local archaeological dig discovers an artifact with indecipherable writing (that turns out to be a warning not to open that tomb). The character who ridicules everyone who believes these warning signs always meets a horrible death.
- Don't let fear paralyze you. The character who stands horrified in front of the vampire, the giant spider, or the zombie dies. The character who runs away gets a chance to be frightened another day.
- Study the fear. The scientist who can dissect the alien creature, go face to face with the slime-dripping jaws, and wipe away the disgusting goo stands the best chance of beating the menace. So, do your own dissection by compiling a list of the legitimate long-term fears. (Try not to worry about everything. Yes, Earth could get hit by a comet that sends out an electromagnetic pulse that takes down every computer system, but I don't think you need to plan for where to safely keep your paper backups. You'll have bigger problems.)
- Remember that rising fear means rising volatility—and that volatility can equal opportunity. Volatility is scary. I'm not fond of 200-point drops in the Dow industrials followed by 300-point jumps or 10% month-long rallies followed by 15% corrections. But the heightened volatility of the past decade is likely to go on for a while. That's going to drive the buy-and-holders nuts, especially if the net gain or loss is close to zero. (In some cases, we should be so lucky. The Nasdaq Composite Index peaked at 5,049 on March 10, 2000. It closed Friday at 2,479.)
- Don't join the panic. Towns about to be hit by a plague of zombies, an outbreak of giant worms, or an uprising of ghouls from the cemetery under the subdivision descend into panic. People run hither when yon would have been safer. They flee in crowds when ducking down a side street would make escape easier. In investing, we say that markets swing to excess, and nothing gets more excessive than a market that knows it really has something to fear.
- Buy your hedges early. You don't want to be in the mob of last-minute pump and salt buyers at the hardware store when the news gets out that you can kill the flesh-eating Triffids by pumping salt water at them. It's the same with any financial hedge. The earlier you buy the protection, the cheaper it is.
A reasonable list of worries would include: Huge levels of sovereign debt in developed economies from Greece to the US to Japan; a steady decline in the US dollar; runaway increases in the money supply in both debtor nations (such as the US) and lender nations (like China); an increasing tolerance for inflation; rising nationalism that makes global solutions, such as for currencies, climate change, or water scarcity, extremely difficult; a global financial system that still has too much bad debt stashed off the balance sheets of banks, state-owned businesses, and national governments; and an aging world population that makes solving any of these problems harder and that threatens a steady drain on savings—in those countries that have any.
But it will mean lots of chances to buy low and sell high. You don't have to be a daytrader or even a trader to take advantage. Volatility can be a good friend even to long-term portfolios, because it gives an investor lots of chances to build positions over time. And to sell partial positions at a profit.
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- Rethink safety. "That town seems normal" may be just the last cruel disappointment in "Invasion of the Body Snatchers" before Dana Wynter's character is turned into a pod person, but diversification does offer real protection from the financial zombies. Worried about the long-term decline of the US dollar? How about the Canadian and Australian dollars? Worried about the soundness of US or Chinese banks? What about their counterparts in Brazil or Singapore?
- Don't follow the mad scientist. He is mad, you know. Gurus promising 80% returns, guaranteeing total protection from a falling dollar and rising inflation, or touting themselves as the next Warren Buffett remind me of the crazed Victor Frankenstein as he shouts, "Mad? Mad! The world thinks me mad!" Well, yes, by golly.
- Don't fall asleep. (See Dana Wynter above.) Never go to sleep with your windows open when the nights have been troubled by bats. Never let your kid watch TV late at night after she's told you that she hears voices calling to her from the set. And never take your eyes off your portfolio if you're worried about financial zombies. Take profits. Shift allocations. Never fall in love with your picks.
- Stay alert for anything that promises a solid return without outsize risk. Remember that the idea is to make money while waiting for your fears to take solid shape. If you're worried about the long-term decline of the US dollar, you should still be able to find profitable investments in the medium term. Keep half of your brain on high alert for the financial zombies and half on alert for profitable investments. If this sounds hard, it is. (See "The Man With Two Brains" for instructions.) But I think it's possible.
Of course, the earlier you buy the option, the longer you'll have to wait for the end of the world and the greater the possibility that information you discover after your purchase will make the protection unnecessary. But there's obviously a point when the low price of the hedge makes the longer time until you need the hedge attractive.
Right now, I'd ask whether we're at that point in real estate (if you want an inflation hedge), natural gas (if you want an energy, climate change, or inflation hedge), or stocks in economies that are in a group that haven't yet achieved anything like BRIC star status (as a hedge against a falling dollar). BRIC stands for Brazil, Russia, India and China. This hedge might include Vietnam, Indonesia, Egypt, and Turkey.
For example, today, I'm adding Citigroup (NYSE: C) to Jubak's Picks (see my blog post later today for details, such as a target price). That's not because I love the long-term story for Citigroup or think the US economy is going to grow like gangbusters, but because I see the stock as a 12- to 18-month recovery play as the bank goes from worse to merely bad. (For more on US banks and thinking about recovery versus long-term prospects for the group, see this recent column.)
At the time of publication, Jim Jubak's personal portfolio did not include shares of any company mentioned in this column. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in stocks mentioned in this column. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.
Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.
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