Monday, June 29, 2015

"Groups also make people feel safe, letting them take more dangerous courses. When people see others, or even past evidence of others, at a site, they keep to the established path even when they were trained to know better. If other people have done it, or are doing it, it has to be okay." --Esther Inglis-Arkell

THE SECOND HALF OF 2015 WILL INTENSIFY TREND REVERSALS (June 29, 2015): Most investors haven't even noticed that there have been critical changes in primary trends for most assets during the first half of 2015, and those which haven't yet changed direction are likely to do so soon. Among the first sectors to switch direction were numerous assets that pay above-average dividends including utilities (XLU), consumer staples (XLP), real-estate investment trusts or REITs (IYR), and U.S. Treasuries (TLT). All of the above performed extremely well during 2014, so when they appeared near the tops of the lists of best-performing securities, many people who love to own last year's winners bought them at the beginning of January 2015. Since then, all of the above have been in downtrends. Most analysts believe that these are merely intermediate-term corrections, but I believe it is far more likely that these downtrends represent the beginning of bear markets which will continue for two or three more years.

Another key asset which likely reversed direction during the first half of 2015 was the U.S. dollar. The greenback peaked at a 12-year top versus most global currencies during the middle of March, and has since made numerous lower highs as can be seen in a chart of the U.S. dollar index. Most analysts and advisors are continuing to make investment recommendations as though the U.S. dollar is merely suffering a temporary decline and will soon surge to even higher highs, but I think that a much more likely scenario is for it to accelerate its downtrend. If this proves to be the case, then it will explain why most emerging-market currencies, emerging-market equities, and the shares of most commodity producers have been climbing also since the second or third week of March 2015. These uptrends have been even less noticed by most investors than the downtrends for high-dividend securities, partly because they tend to be relatively small in total capitalization and aren't followed as often by the average person. Many of these assets had been in bear markets since April 2011 and didn't bottom until near the end of 2014, in March 2015, or in some cases may not yet have completed their ultimate nadirs for the cycle. While most investors are aware that many popular securities had achieved all-time highs during the first half of 2015, far fewer people realize that most emerging-market and commodity-related assets had slumped to their lowest levels in roughly six years.

One key feature of the financial markets is that perception can often take a very long time to catch up with reality. By Labor Day of 2008, we had already been experiencing a bear market for 15 months for small-cap U.S. equity indices and more than 10 months for the best-known indices, but almost no one believed that the bull market had really ended. By the time investors suffered through the Lehman bankruptcy and a subsequent plunge, it was too late to sell at favorable prices. The same thing will happen again this time, as people keep coming up with excuses not to sell when the S&P 500 is above two thousand and end up once again panicking and selling the next time the S&P 500 is below one thousand. People hate to sell high because they are convinced that there's nothing serious to worry about; when it is time to buy low, they find all kinds of gloomy reasons why they should procrastinate in taking action. We have experienced all of the negative divergences which are typical in the early stages of a bear market for U.S. equity indices, including 1) a dwindling number of new 52-week highs; 2) persistent insider selling except for commodity-related assets and a few other subsectors; 3) an increasing number of U.S. stocks which have begun bear markets; 4) increasingly poor overall market breadth; 5) the most knowledgeable investors have been among the most aggressive sellers while the least experienced participants have been the most eager buyers in recent months. As usual, investors won't pay attention to any of these signs until we have already experienced a sharp correction.

One of the reasons for these reversals in behavior is that, after having been in a nearly deflationary environment for years, we are beginning to experience the early stages of a worldwide inflationary resurgence. Wages are rising in the United States and elsewhere. After having traded near their lowest levels in five to seven years, various commodities have begun to rebound--most recently and dramatically for agricultural products including corn, soybeans, and wheat which have been surging since the middle of June after having slumped to multi-year lows. Crude oil has been moderately rebounding since the middle of January 2015, while most energy-related commodities and the shares of their producers have been especially depressed and represent compelling bargains including natural gas producers (FCG), uranium mining companies (URA), and coal mining shares (KOL). Gold and silver mining companies have been far outperforming gold and silver bullion since March 10-11, 2015, and remain worth buying as they have been forming bullish patterns of numerous higher lows since then.

Tax tip: If you own shares or funds which are trading near six-year bottoms and you are a U.S. resident, you can take advantage of their currently depressed prices if these assets are in your 401(k), 403(b), SEP-IRA, Keogh, traditional IRA, or other non-Roth retirement account. You can convert these shares from your account to a Roth IRA and pay taxes based upon their present low valuations. As these eventually rebound, all future gains will be completely tax free. In the event that these shares don't recover but end up retreating further in price, you can choose to undo your conversion, which is known as a recharacterization. You can then wait at least 30 days, or until the following calendar year--whichever is later--and then convert them again. There is no limit to how many times you can repeat this process and there are no income or other restrictions in making such conversions and recharacterizations, as long as each recharacterization is done on or before October 15 of the year following the date when the conversion had been done. It's like being able to go back in time and "unbuy" something which doesn't go up in price. It's heads you win, and tails you also win. Unfortunately, I do not know of an equivalent strategy which is permitted in any other country besides the United States.

Disclosure: In August-September 2013, and at various points during 2014 through June 2015, I had been buying the shares of emerging-market country funds whenever they had appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares--and more recently energy shares--especially following their most extended pullbacks. Prior to the stock market's recent correction, I had also been accumulating HDGE which is an actively managed fund that sells short U.S. equities, because I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own GDXJ, KOL, XME, HDGE, GDX, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, FCG, VGPMX, BGEIX, VNM, NGE, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position since June 2013 to less than 4% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG but I have been repurchasing it following its recent collapse because there has been intense buying by top corporate insiders of companies which produce natural gas. I expect the S&P 500 to eventually lose about two thirds of its recent peak value, with its next bear-market bottom occurring within several months of October 2017. The Russell 2000 Index and its funds including IWM have only modestly surpassed their highs from the first week of March 2014, while the Russell Microcap Index (IWC) marginally surpassed its zenith from March 6, 2014. The S&P 500 Index set a new all-time high on numerous occasions during the same period, and may have completed its final top for the cycle at 2134.72 on May 20, 2015. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.

Monday, June 15, 2015

Email account fixed.

Hello all,

Just a brief update letting you know that the issues with my sjkaplan@truecontrarian.com email account have been resolved.  If you emailed me in the past few days and did not hear back, feel free to try again and I will respond promptly.

Thank you,
Steven Jon Kaplan, CEO

Wednesday, May 27, 2015

"When herd behavior takes over, people don't realize when they are taking risks. They stop analyzing the situation, and go with the group, with the plan, with the familiar way. That makes it easy to drift into disaster without ever being aware that they're in danger." --Esther Inglis-Arkell

2015-2016 IS NOT GOING TO BE A REPEAT OF 2013-2014 (May 26, 2015): Most investors have positioned their portfolios in the anticipation that 2015-2016 will be nearly identical to 2013-2014. Therefore, they are emphasizing the theme of a rising U.S. dollar, falling commodities and commodity producers, slumping emerging markets, outperforming U.S. stocks and bonds, surging global real estate, outperforming high-dividend assets including utilities and REITs, and retreating currencies of commodity-producing countries. However, now that roughly one hundred central banks around the world are fighting deflation, we have begun to experience a global inflationary resurgence which will continue and intensify into 2016. Because most people don't expect significant changes from last year or the year before, they have bid up deflation-loving assets to the point where most of them are far above fair value, while causing inflation-correlated securities to trade near their respective six-year nadirs. There is a lot of money to be made from reallocating your portfolios for an opposite alignment, since if commodity producers and related emerging market equities merely regain half of their losses since April 2011 then they will enjoy dramatic percentage increases from their current valuations.

The primary reason that investors don't modify their portfolios when it is optimal to do so is psychological. People don't like to tamper with the status quo when they are satisfied with it. If an asset has become especially overpriced, and may even be in a bubble, people won't be eager to sell it out of concern that it may eventually return to fair value. Instead, they will observe how nicely and smoothly it has enjoyed an extended price increase, and will either buy more or do nothing. Several people I know have recently been purchasing real estate in the most overvalued parts of the world, because they can't imagine that a wildly overpriced house must eventually return to fair value--and will likely continue to decline well below fair value just as any asset usually does. As with most investors, they repeatedly project the recent past into the indefinite future. If something hasn't recently slumped in price, or hasn't recently rallied strongly, then most people will have great difficulty imagining that it can do so. This is true even if the same currently undervalued asset has rallied several times in recent decades. Each time it emotionally seems completely different, so that investors don't conclude that what happened numerous times in the past will most likely occur again.

Large-cap U.S. equity indices have so frequently set new all-time highs in recent years that it is challenging for most investors to imagine that we are very likely to experience a repeat of 2007-2009 with the possibility of even greater percentage losses for the S&P 500 and the Nasdaq primarily because they became more overvalued in 2015 than they had been in 2007 by nearly all historic measures. VIX has been forming higher lows since July 3, 2014 when it had bottomed at a 7-1/2 year nadir; the last time it had behaved the same way was when it had plummeted to a multi-year bottom on December 15, 2006 and thereafter began to complete several higher lows. Similarly, many commodity producers have been in downtrends which didn't end until recent months and which in a few cases may not be over. A four-year bear market is long enough to emotionally convince most people that an upcoming extended uptrend is highly unlikely. Even though the most severe bear markets are almost always followed by the strongest bull markets, investors will almost always emotionally conclude that it will take years for a recovery to occur and that it will be tentative and tepid. In February and early March 2009, even optimistic investors couldn't imagine that U.S. equity indices would rebound in a meaningful way until many years had passed. Instead, after the bottoms on March 6 and March 9, 2009, we had one of the biggest two-month percentage gains for U.S. equity indices since the Great Depression.

The U.S. dollar index had rallied in the middle of March 2015 to its most elevated point since March 2003, thereby marking a 12-year top. It thereafter slumped for two months, and recently rapidly recovered more than half of its decline. Most investors have concluded that it is merely a matter of time before the greenback sets new multi-year zeniths versus most global currencies, not recognizing that there has been a dramatic shift which has impacted all assets. Central bank efforts to combat deflation have been succeeding, even in places like the eurozone where economic growth has accelerated at its fastest pace in two years. Since we haven't experienced surging inflation since the first several months of 2008, most people have forgotten how it occurs and psychologically don't fear it because it hasn't happened lately. Anything which has occurred recently has far more emotional impact than something which hasn't existed for years or decades. With almost no one being concerned with the possibility of an inflationary resurgence, rising wages and prices could reach a very advanced stage before most people would perceive it negatively. Recently, all signs of rising inflation are greeted happily by central banks and by nearly all analysts and advisors. Until this situation changes, which it must because it is so abnormal, inflation will be able to increase as much as it wants since no one is going to do anything to slow it down.

Most overvalued assets are likely to lose 60% or more of their value. This seems unimaginable to most people, but whenever something has become especially overpriced then it almost always first slumps to fair value and then continues to decline until it is selling at a significant discount. During the 2007-2009 equity bear market, no bourses fell to fair value and then went sideways. Instead, the discounts to fair value at the previous bear-market bottoms averaged between 30% and 50% in most countries including the United States. Similarly, when U.S. real estate was slumping in 2007-2009, many neighborhoods in states including Arizona, Nevada, and Florida didn't merely slide to fair value and then stop. They continued to decline until the ratios of prices to incomes in many areas was between 1.0 and 1.5 times average household income versus a normal average of between 2.5 and 3.0 times. Today, in cities including Vancouver, BC and San Francisco, some neighborhoods have ratios of prices to incomes which exceed 10. The most likely continuation is therefore a collapse of perhaps two thirds for residential real estate in these and similarly overpriced cities, which almost no one can imagine because people are only able to foresee any given outcome when it is an extension of recent behavior.

Utilities and REITs have been among the poorest-performing assets since they had peaked in January 2015, and this pattern will likely continue and spread to other high-dividend securities which tend to perform worst whenever inflationary expectations are accelerating. These are not merely corrections; high-dividend securities have probably begun multi-year bear markets which will continue into 2017 and perhaps also 2018. Even with their recent retreats as the U.S. dollar index has sharply rebounded in recent weeks, many of the best-performing securities of 2015 are emerging-market stocks and the shares of commodity producers which had almost all been especially elevated in April 2011 and had slumped toward six-year bottoms from November 2014 through May 2015. With little fanfare, U.S. equities are among the worst-performing global stock markets during the current calendar year. U.S. bonds, especially long-dated U.S. Treasuries, have slumped in recent months along with most high-dividend securities. The currencies of commodity-producing countries have mostly been the biggest gainers in recent months. While these patterns may not immediately seem to be interrelated, what they all have in common is that they are all anticipating worldwide inflation to become more clearly evident. Just when most investors have become convinced that deflation is a serious threat, the reality is the opposite.

If you are betting on a horse race, the ideal scenario is when an odds-on favorite is being priced as though it were a highly unlikely long shot. That is currently the situation in the global financial markets, where many commodity producers are among the most likely securities to benefit from rising worldwide inflationary expectations along with a retreating U.S. dollar. Most emerging markets have already been rebounding for several weeks or longer from their respective six-year lows. Because it is psychologically easier to stick with the favorites you know rather than having to research new ones, most investors have decided that 2015-2016 will be almost exactly like 2013-2014 and have therefore made very few changes to their portfolios. The majority of people will end up with net losses for both stocks and bonds by the end of 2015, which will progressively encourage them to eventually buy the best bargains especially if they have recently been among the latest hot performers. These will consist primarily of those assets which benefit from rising inflationary expectations, and which will--with periodic sharp corrections such as the one we have experienced recently--climb toward the top of the best-performing lists for the current calendar year. These trends are likely to become even more pronounced in 2016.

Tax tip: If you own shares or funds which are trading near six-year bottoms and you are a U.S. resident, you can take advantage of their currently depressed prices if these assets are in your 401(k), 403(b), SEP-IRA, Keogh, traditional IRA, or other non-Roth retirement account. You can convert these shares from your account to a Roth IRA and pay taxes based upon their present low valuations. As these eventually rebound, all future gains will be completely tax free. In the event that these shares don't recover but end up retreating further in price, you can choose to undo your conversion, which is known as a recharacterization. You can then wait at least 30 days, or until the following calendar year--whichever is later--and then convert them again. There is no limit to how many times you can repeat this process and there are no income or other restrictions in making such conversions and recharacterizations, as long as each recharacterization is done on or before October 15 of the year following the date when the conversion had been done. It's like being able to go back in time and "unbuy" something which doesn't go up in price. It's heads you win, and tails you also win. Unfortunately, I do not know of an equivalent strategy which is permitted in any other country.

Disclosure: In August-September 2013, and at various points during 2014 through March 2015, I had been buying the shares of emerging-market country funds whenever they had appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares--and more recently energy shares--especially following their most extended pullbacks. I have also been accumulating HDGE which is an actively managed fund that sells short various U.S. equities, because I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own GDXJ, KOL, XME, HDGE, GDX, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, FCG, VGPMX, BGEIX, VNM, NGE, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position since June 2013 to less than 4% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG but I repurchased it following its recent collapse. I expect the S&P 500 to eventually lose about two thirds of its recent peak value--with most of that decline occurring in 2016-2017. The Russell 2000 Index (IWM) has only modestly surpassed its high from the first week of March 2014, while the Russell Microcap Index (IWC) barely surpassed its zenith from March 6, 2014. The S&P 500 Index set a new all-time high on numerous occasions during the same period. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.

Sunday, May 17, 2015

Before It's Raining Credit

The key to starting up and growing any business is constantly discovering and milking the ways in which the business recognizes unfulfilled needs in society.  It's not that divergent from contrarian investing philosophy.  In starting up a business, one has to be prepared to venture into uncharted territory with the faith that such venture will be profitable.

In the past few days, I've seen more and more that Filiem is a promising venture.  Though many people seem to recognize a need for students to receive education in financial literacy, new initiatives to make this happen are quite sparse.  In particular, I haven't found any widespread digital materials, which many would agree would be necessary to reach students in their current frames of mind.

In a world where 84 percent of college students in the U.S. self report a desire to learn more about personal financial management (nationwide.com), I can confidently say that the need for a program like Filiem is great.  The credit cards given to college freshmen upon their arrival may be contributing to the average of $4,100 in credit card debt with which these students graduate.  Do we require students to take a brief course online, such as the one I want to offer, before activating these cards?  Do we require them to take such course online at the same time as they carry out other responsibilities such as roommate questionnaires? There are many possibilities, all of which I hope to tackle in the very near future.

I remember being a college freshman five years ago.  We were required to take an online course on alcohol consumption and score a certain number right on the questions following the videos to pass. We also listened to a skit on sexual violence upon arriving at campus.  It was a proud moment when a program on mental health was added to this conglomerate of pre-college preparations.  In my opinion, financial literacy fits right into the mix.  I've wasted no time in suggesting the addition of a financial literacy orientation course to my alma mater.  If they respond well, there's no reason why this concept can't spread.

Having started up many projects in the past, most of which have continued into the present, I've found that the most important tool is confidence.  As corny as that may sound, it seems to me that confidence in the uniqueness of one's idea is the common thread between a lot of successful ventures. Believing in the potential success of an idea is necessary but moreover, believing that an idea can and should transcend what already exists in society is powerful.  I hope that all of you will continue to follow this idea's progress.

Best wishes for the coming week,

Danielle Kerani
VP | True Contrarian
www.truecontrarian.com

Friday, May 8, 2015

A Brand By Any Other Name

Nearly four years ago, when I designed this website and the logo for True Contrarian, I was embarking on my first professional adventure in the world of branding.  I thought about the concepts behind Steve's idea and brainstormed ways in which I could convey that aura in a concise package. The backwards C was born and so was the blogging platform on which I'm writing this update now.

Since that summer in Boston, I've worked with many people outside of the investing world to develop their personal brands or the branding needed for their businesses.  It's not very different from psychology, as branding requires a certain ability to see into a client's soul and pick out the elements that need to shine on first glance.  For the financial literacy venture I mentioned in the blog below, I want to communicate the belief that an education in financial literacy and create a large sense of empowerment.  I thought about the best way to translate that belief into marketing language and came up with this:


When people see this logo representing the financial literacy course materials I am creating, I hope their main understanding is that an education in financial literacy is necessary for empowering society.  A specific spin off the general theme of youth empowerment, this course package will serve as a potential solution for the strife and confusion that many young people feel when taking on adult responsibilities for the first time.  After all, most of the power any of us hold lies in understanding.  If we understand a concept, it has less of an opportunity to intimidate us.  I want the basics of personal finance to be more accessible and eventually, cease to be intimidating.  

No matter what industry you are in, I can imagine that you're starting to see how necessary branding is for your business' survival.  A recent tech fair I attended in New York was in essence a mirage of brands, appearing one after another in their respective booths.  There were too many booths for me to possibly engage with them all, so the booths I stopped at were the ones that I thought presented the most captivating brand packages.  Sorting through all the swag I received days later, I struggled to remember my interactions with some of the products where as some were fresh in my mind.  

The brands of our businesses serve as a gateway for people's interest and most often speak on our behalf before we even get a change to do so.  That's why whenever I am faced with a new idea, whether it's mine or someone else's, I devote a lot of preliminary work to branding.  I have little foresight as to where Filiem is going to go, but I am excited about the direct connection my logo draws between financial literacy and empowerment.  I look forward to sharing more in the near future.  

Best wishes for the upcoming weekend, 

Danielle Kerani Oberdier
VP | True Contrarian
www.truecontrarian.com

Wednesday, April 22, 2015

The Biggest Financial Question And Why We Should Ask It

There are many questions one can ask about the financial world in its current state.  For example, is the dollar going to fall?  At which prices are our favorite commodities a smart buy?  How can we execute our tax procedures with maximum efficiency? And what about retirement?

I have worked with True Contrarian for four and a half years and attribute most if not all of my financial knowledge to my experience with True Contrarian and primarily to Steven Jon Kaplan. And as I grew more invested, for lack of a better word, in the financial realm, I started to notice that even basic knowledge about personal finance is not readily available in society.  We may be taught the standard theoretical concepts of supply and demand in an economics class.  We may be told by our banks that opening a credit card at a specific day or time is optimal.  But where are we taught how to open a simple investment account and advised how to use it?  Where are we taught about tax procedures so that we are prepared when we first start making an income?  I find that many people believe that management of personal finances is only for people with significant wealth to manage. But financial empowerment can and should be a universal feeling.  I believe that basic knowledge about financial planning should be readily available to anyone who has goals for the future.  Moreover, I believe that financial planning should be something more valued in society as a concept that transcends one's current economic status at the time.  

How can we train ourselves and the next generation to be financially literate?  In other words, how can we provide resources to society that both educate the public about their finances and make them believe that this education is necessary?  In my opinion, people should have a basic knowledge about savings, taxes, investing and even retirement plans before even enrolling in higher education.  It seems a little skewed to me that information on such practical skills appears to be the hardest to find.

A long term goal I have for True Contrarian is to take on this responsibility.  I would love to set up programs within schools where brief courses or at least some education materials are promoted and readily available to students.  Between Steve's connections with the New York City public school system, mine at the preparatory programs I attended, and our mutual connections at universities, spreading such knowledge is a feasible goal.  However, in the meantime, all we want is to make advice on financial planning accessible to anyone who wants it for a reasonable fee.  

Our new financial coaching program at True Contrarian is meant to provide knowledge to those who ask and also to promote the idea on a larger scale that information on these practical topics is necessary in society. I want financial empowerment not to be about how much money one has but rather the attitude with which people approach whatever they might have.  Our coaching program is a small start down that path and I'm excited to see how it develops in the near future.  If you would like more information about our program, click here.  

Danielle Kerani Oberdier
VP | True Contrarian


Tuesday, April 14, 2015

"Whenever you find yourself on the side of the majority, it is time to pause and reflect." --Mark Twain

IT'S TIME TO START PRICING IN THE NEXT U.S. PRESIDENTIAL ELECTION (April 14, 2015): Every four years, a week or two before each U.S. Presidential election, there will be a flood of articles in the media about how you can allegedly take advantage of the upcoming election to adjust your portfolios. However, by the time that the election process has become so advanced, nearly all of the price adjustments will have already been made. Following the election itself, there is usually a brief and sometimes dramatic readjustment in response to the expectation that the new President will implement policies which are favorable to some sectors and unfavorable to others. However, the real money is made by anticipating far in advance what is most likely to occur no matter who wins, and how most investors are likely to behave as the election more closely approaches.

On Sunday, Hillary Clinton announced that she was running for the Democratic nomination, and on the following day, Marco Rubio announced his Republican candidacy. While it is possible that a different Democrat will prevail, it is highly unlikely. There will be many challengers to Marco Rubio, and his chances are certainly much less than those for Clinton because of much more intense competition, but I'm going to go out on a limb and assume that the Florida senator will prevail on the Republican side due to a combination of youth, charisma, debating ability, his Cuban background, and various intangibles. If it's going to be Rubio vs. Clinton in November 2016, then how will this affect the financial markets for the next 1-1/2 years?

Perhaps the most important point is that U.S. government deficits will likely get larger instead of smaller, regardless of the results of the 2016 elections. If Hillary Clinton becomes President, then there will likely be a surge of new proposed government programs with very few brakes put on current entitlements. Increased taxes might be proposed, but these will be challenging to actually achieve unless both the Senate and the House of Representatives unexpectedly switch simultaneously to Democratic majorities. With a Republican-dominated Congress and a Democratic President, it won't be significantly different from the current gridlock situation. Almost no new legislation will be passed. Meanwhile, because it has been so long since we've experienced a bear market, a severe one will likely occur regardless of who is President. Without the Fed being able to cut rates further, the only stimulative response to counteract a recession would be increased government spending, so both parties will be eager to prove that they're "doing something about" the economic slowdown. Translation: expect higher deficits perhaps exceeding one trillion dollars annually as we had experienced several years ago. This will contribute to a lower U.S. dollar and elevated interest rates. These reactions won't wait until after the election; we'll likely see a slump in the greenback along with rising Treasury and other bond yields in 2015-2016 in anticipation of the election rather than in response to it. It is possible that the U.S. dollar has already peaked, and that U.S. Treasuries and many U.S. corporate bonds have already done likewise.

What if Rubio prevails? In that case, you can be certain that, especially with a cooperative Republican Congress, there will be numerous tax cuts and lower marginal rates which will lead to rising deficits. There will be some cutbacks to entitlements, such as raising the retirement age for Social Security from 67 to 69 just as Ronald Reagan compromised with Congress to increase it from 65 to 67. The Medicare cutoff point could also be increased by two or more years. These will reduce government expenditures, but if you have studied Rubio's speeches you will see that his Tea Party credentials are misleading. He will likely be happy to run large deficits as long as government spending fits Republican priorities rather than Democratic ones. His theme will be one of compassionate conservatism, especially since he will keep an eye on being re-elected in 2020. With a combination of less tax revenue and limited reductions in government spending, deficits will end up increasing almost as much as they would have done with a Democratic President. If we are in a recession and it becomes severe, then Republicans won't want to be seen as being indifferent to middle class suffering. Thus, the overall impact on the U.S. dollar and interest rates will be surprisingly similar with either a Democratic or a Republican victory.

The primary difference will be in corporate regulation. If Hillary Clinton wins, then there will likely be much more regulation than if Rubio is the next President. Climate change is a popular platform in many Democratic circles, but is mostly disregarded by Republicans. Commodity-producing industries, especially mining, are likely to be treated much more favorably if Republicans prevail in the next election. In contrast, health-care stocks, which have been all the rage in recent years, are likely to fear potential changes to Obamacare and likely perform poorly if the possibility of a Republican victory improves at any time prior to the election--even if it is many months before the event itself.

Because of a falling dollar and rising interest rates, sectors which usually benefit from a strong greenback and falling rates will tend to be hard hit no matter who is elected President. This would include high-dividend shares including utilities, REITs, telecommunications stocks, and tobacco shares. Companies which do a lot of exporting will be helped by the falling U.S. dollar, while major importers will do less well than expected. Securities which benefit from rising nominal interest rates will be among the few winners and will thus receive a lot of money from asset reallocations, thereby making them especially likely to outperform since they will stand out starkly from almost everything else which is losing value. If inflation is increasing faster than interest rates then real yields will become increasingly negative, which will be especially supportive for commodities and the shares of their producers.

If the Republicans control the Presidency and both houses of Congress, then this will pave the way to a potential flood of new legislation. While this could favor some industries, the initial response by many investors will be fear of the unknown after several years of effective gridlock. If U.S. assets are already in a bear market by November 2016, which is highly likely, then such a bear market is likely to accelerate dramatically after the election. There might be an initial euphoric response to either candidate's victory, but perhaps around the time of the Presidential inauguration on January 20, 2017 or shortly thereafter, any bear market could enter an especially intense worsening. Following President Obama's election to his first term on November 4, 2008, there was a sharp drop for U.S. equity indices which continued for nearly a half year. It is likely that we will have similar behavior following the next election. The anticipation of any election contest creates a sort of anticipatory excitement and tends to delay the final stage of any bear market. Therefore, I think it would be a good idea to sell most U.S. assets now, when the mood is still optimistic about the future, rather than as the reality of a new administration becomes increasingly imminent and investors begin to focus on specific policy and thorny issues which will be challenging to politically resolve no matter who is in charge.

One interesting wildcard will be what happens with U.S. real estate during the next several years. Policies such as zero down payments (or 3% down where the 3% can be borrowed, as Fannie Mae and Freddie Mac implemented in early February 2015), interest-only mortgages, and similar policies which were assailed and temporarily restricted following the last U.S. housing slump are now back in full force, having received limited opposition from either political party. The problem with allowing almost anyone to buy a house is that it temporarily increases demand relative to supply, thereby increasing prices just long enough to encourage new buyers prior to the next recession when valuations will plummet more sharply from having become artificially inflated. Credit standards are moderately higher than they had been a decade ago, but there are more investment funds which have bought real estate in recent years--thus offsetting the reduced demand from the least creditworthy individual buyers. The problem with investment buying is that higher interest rates will cause the net yields from real estate to appear increasingly unattractive, which could encourage some of these funds to become net sellers rather than net buyers. Higher mortgage rates will likely also discourage some buyers from participating because their monthly payments will be unaffordable at current price levels. Regardless of who is elected as the next U.S. President, the dangerously relaxed lending standards of Fannie Mae and Freddie Mac are likely setting the stage for a repeat of the U.S. real-estate debacle of 2006-2011. We will probably once again experience declines averaging 34% which had been the nationwide average loss during the previous bear market. As in 2006-2011, some parts of the United States in 2015-2020 will suffer losses of 60%, although the regions which experience such outsized losses won't likely be the same ones as last time. San Francisco and other especially overvalued cities in the United States are probably most vulnerable to losing half or more of their value. Because this topic is so complicated, I will discuss it in more detail in my next posting.

Tax tip: If you own shares or funds which are trading near six-year bottoms and you are a U.S. resident, you can take advantage of their currently depressed prices if these assets are in your 401(k), 403(b), SEP-IRA, Keogh, traditional IRA, or other non-Roth retirement account. You can convert these shares from your account to a Roth IRA and pay taxes based upon their present low valuations. As these eventually rebound, all future gains will be completely tax free. In the event that these shares don't recover but end up retreating further in price, you can choose to undo your conversion, which is known as a recharacterization. You can then wait at least 30 days, or until the following calendar year--whichever is later--and then convert them again. There is no limit to how many times you can repeat this process and there are no income or other restrictions in making such conversions and recharacterizations, as long as each recharacterization is done on or before October 15 of the year following the date when the conversion had been done. It's like being able to go back in time and "unbuy" something which doesn't go up in price. It's heads you win, and tails you also win. Unfortunately, I do not know of an equivalent strategy which is permitted in any other country.

Disclosure: In August-September 2013, and at various points during 2014 through March 2015, I had been buying the shares of emerging-market country funds whenever they had appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares--and more recently energy shares--especially following their most extended pullbacks. I have also been accumulating HDGE which is an actively managed fund that sells short various U.S. equities, because I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own GDXJ, KOL, XME, HDGE, GDX, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, FCG, VGPMX, BGEIX, VNM, ZJG (Toronto), NGE, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position since June 2013 to less than 4% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG but I repurchased it following its recent collapse. I expect the S&P 500 to eventually lose about two thirds of its recent peak value--with most of that decline occurring in 2016-2017. The Russell 2000 Index (IWM) has only modestly surpassed its high from the first week of March 2014, while the Russell Microcap Index (IWC) barely surpassed its zenith from March 6, 2014. The S&P 500 Index set a new all-time high on numerous occasions during the same period. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.