2008 Wrap-up & Our Experts’ Early Thoughts On 2009

Last updated December 19, 2008. No transactions since then.

2008 Performance
As I explained in Letter 3, when I began direct management of investments for about 35 people in 1999, I committed the project to God and asked Him to reveal to me to whom I should listen. At the same time I told my investors that if we had one down year, I would discontinue managing money for them. For the eight year period ending December 31, 2007, we had no down years, and averaged high double digit returns per year for that period.

Then 2008 arrived. At the end of November, my portfolio was down 4.5% year-to-date. By December 19, it had fallen to a loss of about 9% year-to-date. At that point I would have estimated the probability of 2008 being an up year at about one in fifty. But in the last few days of the year, the portfolio experienced a strong snap-back. Almost everything I held went up, and I finished the month of December up 5.1%. For the year 2008, the portfolio actually finished up .35% (that’s about one-third of 1%). Of course, it wouldn’t have mattered if 2008 had been a down year, because I had already discontinued direct investment management at the end of 2007 anyway. I have always believed God has a sense of humor. I can’t prove it of course, but He may have engineered enough gain the last few days of the year to stretch my string of up years to nine. Whatever the case, all I can say is praise Him! 

The Permanent Portfolio Fund (PRPFX)
PRPFX closed 12-31-07 at 36.04, and closed 12-31-08 at 32.71, a decline of $3.33 per share. Adding back the $.29 cash dividend it paid December 2, 2008, its actual decline for the year was $3.04 per share, a loss of 8.4% for 2008. None of us had any idea 2008 would be the kind of year which occurs probably twice a century, but it was. I cannot tell you how thankful I am that all my widows and most of my lower income investors had most or all of their money in PRPFX. It performed its safe haven role admirably in 2008.

Presently, I do not hold any PRPFX, but my portfolio is structured very similar to it. Had I not been fortunate to have about 20% of my portfolio in natural gas producing properties, which increased in value with the addition of several successful wells during 2008, my results for the year would have been similar to the performance of PRPFX. Those investors who had little or no PRPFX, but who followed my allocation change in March, 2008 (Letter 19), would have gotten similar results. In a year in which most stock averages and commodities were down 40% to 60%, our loss was held at 10% or less. God is not obligated to prosper us financially. He has promised to do only what is in our best interest. But I consider a loss of less than 10% in 2008 a big success. God gets all the glory and praise for that.

Here is how my portfolio looks today.

As you can see, stocks have increased from 12.7% to 14.2% since December 19. Some of this is new investment, the rest increase in market value. When SSRI (my favorite silver mining stock) fell all the way from a high of 48, 14 months ago, to 5 in October, it became a classic panic selling opportunity, losing all relationship to value. I added at 8 and again at 6 (increasing my number of shares by more than 50%). This new investment has almost tripled already! I intend to slowly accumulate more stocks up to my maximum of 20%, hoping to do so on pull backs, but if not, dollar cost averaging, probably next adding to GDX and XLE.

I’m very happy with my gold and silver allocations, and expect silver to outperform gold over the next 3 to 5 years for reasons explained in past letters. Gold outperformed just about everything in 2008, and actually rose 6.8% for the year. This was its eighth up-year in a row (a fact I would guess not one in 1000 individuals is even aware of). Silver fell 23.3% for the year, which negatively impacted my performance. However, these numbers are based on the futures market price which is substantially below the actual market value in the cash markets as explained in past letters. If I had valued my silver at its cash market price, it would have been about even for the year. This will correct at some time in the future. Right now, the best buys appear to be silver, the agricultural commodities (DAG, DBA and RJA), and oil (USO). I plan to accumulate more RJA and USO.

Cash has dropped from 33.6% to 31.3% since the last report, for three reasons: living expenses, giving and new investments. We live and give out of our portfolio.

Thoughts on 2009

We’ve just come through what could be the worst, or second worst, year for the financial markets in 100 years. The bottom for most stock and commodity markets, so far, was made in October. The October bottom had many typical characteristics of a selling climax, or selling panic. And since then the markets have had a decent rally. The Volatility Index has dropped back toward more normal levels, usually a good sign that a significant rally is underway. Yet, several experts point out that there are still a few characteristics lacking before one could say with reasonable confidence that “the” final bottom has been put in, i.e. that “capitulation” has occurred.

I’m not really very interested in what I think, or what it looks like to me. What I am very interested in is what the few experts I have confidence in think and see ahead for 2009. (I suggest you re-read Letter 33 - The Experts' Strategy Made Simple - which I believe fits well with, and helps clarify this letter.)  Here are some recent ideas and forecasts from the top two, Richard Maybury and Jim Rogers. My comments follow each.

Richard Maybury (Early Warning Report, www.chaostan.com)

In a bulletin dated December 22, 2008, Maybury said this:

“Obama is probably told every day that the world is being swept by fear, causing velocity to plunge, and he is the only person who can do anything about it. He is the de facto president of the world. I think Obama and his gang are preparing some kind of PT Barnum spectacular for his inaugural address January 20th. If it works, velocity will reverse, and we will go back to where we were August 07 through June 08 – meaning early stages of a runaway inflation, with non-dollar assets heading for the stratosphere. Gold, oil, copper, art, antiques, almost everything you can name will go to new highs within a few months, and the dollar will plunge. If the PT Barnum spectacular does not work, velocity will continue falling, and we will spiral down into a depression. Non-dollar assets will collapse even further than they already have, and long term Treasury bonds will continue their assent. As far as I know, the only investment plan that minimizes the risk on both sides of this crisis is Harry Browne’s, which I have written about often.” (Editor’s note: He’s referring here to the Permanent Portfolio Fund, PRPFX)

Here are a couple of comments from the January issue of EWR, which arrived January 2, 2009:

“Throughout the 20th century, America oscillated between inflation and deflation. Now, after 94 years of expanding the money supply, the Federal Reserve has created so much malinvestment that mere inflation and deflation are no longer options. I believe it takes such a deluge of dollars to keep the malinvestment alive that the only choice now is between runaway inflation and runaway deflation (meaning a depression).”

“The government and mainstream press, blinded by panic, are focused almost entirely on the runaway deflation, paying no attention to the runaway inflation that will almost certainly begin this year.”

My comments: Maybury admits that he doesn’t know how things will play out, but he gives his forecast for a runaway inflation or runaway deflation a 95% probability. In other words, whichever way it goes, it will be a runaway. If it’s inflation, huge profits could be made in non-dollar investments. If it’s deflation, the best bet would be cash, including gold and silver, and there would likely be increased violence and possibly some form of revolution. I want to be positioned for either scenario.

Jim Rogers (Bloomberg interview, mid-December, 2008)

Here are a few quotes from the above interview:

“Host: People are talking about the depression…it’s probably not going to be quite as bad as that?

“Rogers: Well, it could well be. As you remember, the depression in 1929 was a stock market bubble which popped. We were going into a recession and the politicians around the world started making horrendous mistakes which turned it into a depression. It would have been just a normal recession otherwise, but the American politicians, and the European politicians, everybody got into the act, and that seems to be happening this time too. They’re making a lot of mistakes.

“Host: I was going to say, it sounds like you’re expecting some of the same. Are you planning for a worst case scenario?

“Rogers: Well, I cannot tell you until I see how things unfold. Nobody knew in 1929 it was going to turn into a depression, but by 1931, some of the smart people had figured it out. These things unfold. I’ll have to watch and see how things unfold. I’m certainly prepared for the worst, and if it happens, I hope I take the appropriate action.

“Host: From what you’ve heard from the politicians and central bankers thus far, are you impressed or deeply unimpressed by what you see?

“Rogers: Well, I’m impressed – very negatively impressed. It’s astonishing how badly they’re reacting this time. You would think that some of them would have read some history, or interpreted history properly. Mr. Obama, our new president, ran on a platform that he was going to do two things. He’s going to tax capital. This is a period when the world is desperately short on capital…what a genius. Then, he’s going to protect America. Protectionism led to the great depression in the 1930s, so we’ve got a man now who says he’s in favor of protectionism and taxing capital. If that happens, it’s all over.”

“Host: The Jim Rogers International Commodity Index has plummeted more than 60%. The question of course is, are you keeping faith with those commodities?

“Rogers: The facts are that during this period of time, the only things for which the fundamentals are unimpaired are commodities. Farmers cannot even get loans for fertilizer now. Nobody can get a loan to open a zinc mine. The supply of everything is going to be in even worse shape coming out of this. The supply of everything is going down. We’re going to have serious supply problems before too much longer. The fundamentals for General Motors are impaired. The fundamentals for Bank of America are impaired. The fundamentals for zinc are improved. The fundamentals for cotton are improved. The commodities will be the place to be if and when we come out of it, but even if we don’t come out of it…in the 1970s the economies were bad but commodities went through the roof. In the 1930s, in the great depression, commodities were a much better place to be than stocks. There was no supply.

“Host: What about oil? Where does it fit into the picture?

“Rogers: Well, oil has been crushed as you know. It’s now below the cost of production in many places, and certainly below the cost of production for alternate energy sources, so oil is going to make a huge come back when it does. The International Energy Authority, which does studies on every oil field in the world, came to the conclusion that oil reserves are declining at the rate of 7% per year. You can do the arithmetic. In fifteen years there won’t be any oil left unless somebody discovers a lot of oil quickly in very accessible areas, and the price of energy has to go through the roof again.”

“We have a shortage now of nearly everything in agriculture…a shortage of tractors, tractor tires, wheat, fertilizer, seeds…just about everything. There is really a shortage of farmers now. You know, farming has been a terrible business for the last thirty years, and most of the farmers in the world are old men…we even have a shortage of farmers developing.”

My comments: It’s obvious Rogers has some of the same thoughts as Maybury about the possibility of a depression, and there’s no doubt in my mind that he is positioned to weather a severe deflation should it occur, meaning that he will always have a significant cash position, including gold and silver, both of which he has mentioned recently that he is buying. At the same time he makes a very strong case for the continuation of the secular bull market in commodities, even during a depression.

I believe I can detect a leaning toward an inflationary resolution of this present crisis in the thinking of both of these men. But both admit that we could slip into a severe deflation leading to another major depression. Rogers goes on to say that as things unfold, he should be able to recognize a deflationary resolution early enough to make appropriate changes in his allocations. If either of these men reach the conclusion that we are headed toward depression, and reveal it to us, I would immediately make a change in my allocations, increasing cash, and possibly gold and/or silver. In the absence of that event, I am comfortable with my current allocations, and strategy as stated above in the discussion of my portfolio. In any event, I am not motivated to do much of anything prior to January 20th, and I will be glued to the inaugural address, and especially Maybury’s commentary on it two days later. I’ll let you know if I do anything.

May God bless you in 2009………………………Jay