Thursday, October 25, 2012

Money Show - John Wilson

John Wilson is senior portfolio manager at Sprott Assets Management LLC. His talk is called Behavior's Under Stress - How to Manage Wealth through Volatility.

His outlook is that we are going to have low interest rates for a very long time. Large Scale fiscal debt will require large scale monetization. The monetary expansion will continue to drive asset inflation. Policy uncertainty will keep volatility high for a long time. Also we will have volatility for a long time because we have large problems. Equities will benefit from all this but the ride will be crazy.

There is a possible outcome of hyperinflation if we go to inflation. If we go to deflation, we could have a financial collapse. Why will this last for a long time? It is because of the size of our problem and the breadth of our problem (US, Europe, Japan). The Global financial situation is unsustainable.

(He gave a quote of "One problem with democracy is that it can collapse when governments run out of spending other people's money.")

Japan (QE) spent 8 trillion dollars in 20 years. The US Federal Reserve Bank has spent twice that in far less time. Bernanke says he will print as much money as it necessary to get the results that he wants.

US employment is becoming structural. Unemployment is driving labor participation to the lowest level. (To learn about labor participation rates see Wikipedia.) The US Government is assuming GDP growth rate that is far too high. They will not go over the fiscal cliff, but they will only postpone it.

We should be investing in equities. We should use "active tactical adjustments", that is moving in and out of equity funds. We should be using option overlays (puts are insurance). Use Sprott's process to limit risk. We should protect our portfolio by having equities at 75%, Bonds at 10%, cash at 13% and options at 2%.

The Sprott process limits losses. Good managers are wrong 50% of the time. Great managers are wrong 40% of the time. What we do is cut our winners and let our losses run and this is why we lose money. If any stock is down 30%, we should sell it. Our tools are selling discipline, loss limits, tactical adjustments and option overlays. (A covered call is writing a call to sell stock we own at a higher price than it is now.)

Germany had hyperinflation (just before WWII) because of too much money creation by the government. There are huge social costs to taming inflation. Canada got it act together in the 1990's and got its debt under control. China has stopped buying US treasury notes. They have same amount of notes as they had 2 years ago. (They haven't increased their buying with the increase in supply of treasury notes.)

For market insight views of John Wilson, see Sprott site.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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