Podcast

New Harbor: Now is the Time for Discipline in Protecting Wealth

Lower stock & bond prices ahead
Saturday, August 24, 2013, 3:09 PM

The stock market has been on an upward streak for the past two years, with the Dow and S&P near their all-time highs. Recently, though, they've shown signs of topping. And certainly, the macroeconomic risks loom larger than ever. Where are equity prices most likely to go from here?

Interest rates on bonds have nearly doubled off of their historic lows from a year ago. That puts downward pressure on bond market prices, as well as a tremendous number of other important asset classes, like housing. Where are interest rates most likely to move next?

For these (and other) reasons, the current environment is extremely challenging for investors. The pick-a-sector-and-then-buy-and-hold strategy that has worked well for many of the past several decades is no longer prudent. Investing in today's markets requires more fundamental analysis at the individual company level, as well as a willingness to defensively build up "dry powder" reserves to deploy if indeed (as we expect) a major downward market correction brings assets prices down to much lower levels.

In this week's podcast, Chris talks with the team at New Harbor Financial about the current outlook for the market and what they think investors should be prioritizing:

It is clear that after five to six years of intervention here, the results that we are so somewhat sought and promised are not being delivered. We are having pathetic rebounds and job recoveries and GDP growth. The evidence speaks for itself.

The reality is that most folks forget that the stock market is a forward-looking machine, if you will. Let’s not forget the stock market began rallying back 2009. We have had a pretty long rally here. And for folks to now be saying if the economy starts to get better, that means the stock market will go higher, a lot of that possible future improvement is already more than priced into the gains and the stock market over the last several years since the 2009 low.

Most folks fail to realize that to stock market usually rebounds when economic news is getting worse, not when it is getting better. We think that story is more than played out to an excessive level. Even with the improvements in the economy, we are likely to see a major pullback in the stock market.

And the ten-year note, the world watches the yield on the ten-year U.S. Treasury bond. It really drives the interest rates on so many very important vehicles, not the least of which is home mortgages. Last year, in roughly August of last year, the ten-year bond yield bottomed out at 1.39%, about 1.4%. And most recently, as I look at it right now, it’s at 2.8%. So that is an increase. It is really almost a doubling, actually, if you look at it that way. It really literally is a doubling from about 1.4% to 2.8%, or to put it another way, an increase of 1.4%.

This has had the effect of driving mortgage rates up over a point. Average mortgage rates now are up around 4.6%. They were in the mid 3%’s not too long ago, maybe about six months ago. As interest rates rise, it essentially is toxic for the economy and the stock market, because business owners and consumers are less likely to borrow and reinvest. Homeowners are less likely to borrow and build that addition or move to a bigger home. Companies are less likely to borrow and finance the purchases of other companies, even investing in new plants and equipment. So, it’s just something that everyone is watching. It is something that we are watching closely. Frankly, it is one of the hostile syndromes that John Hussman – another person that we admire and read quite closely. He has a site, hussmanfunds.com – he talks about a toxic syndrome, a more dangerous syndrome in the stock market, and one of those is interest rates rising quickly over the past six-month period. That’s exactly what we are seeing.

This is a huge warning flag. The other day Bill Gross said we have got no one to sell to but ourselves. All assets are inflated. So, certainly it has got us very, very cautious and very defensive.

At this time, New Harbor urges the discipline to be defensive:

Over the next couple of years, returns are likely to be negative in the stock market. It is a very challenging time, to say the least. A very challenging time for us as money managers to continue to do what we think is the right thing. We would urge people that are listening to this podcast: you really have to avoid the urge to make decisions just for the sake of doing something. Everyone wants to do something. They always want their money to be working for them. They want to be in this stock or that stock or that bond or this commodity future.

Sometimes – especially in an era like now where all assets pretty much have been moving in tandem and they are all priced off a risk free rate of 0%, so they are priced to return very poorly at present times because the risk premium has been stripped away from them – you really need to just think about sitting in cash or allocating a good portion of your portfolio to cash. Cash really, truly, is king sometimes. It is an investment decision to sit in cash. If you do not have some cash, you are not going to have the ability to buy at better valuations. Most of your long-term success as an investor – and this applies to money managers who have been hired to invest money for people – is going to be dictated by how well you stick to your discipline and where you deploy money and where valuations are at. So, you really have to think about patience, and that is a hard thing to do.

We as money managers are sitting on a very large amount of cash, in some portfolios over 50% cash. That is really something that not many money managers like to do. That is not something that many retail investors like to do. But money managers have something called ‘career risk’ where they are constantly having to make sure they are staying ahead of or keeping up with the various indices. They are really afraid to hold onto cash, because holding a large cash position is precisely what threatens their livelihood more than anything. Clients do not sit with a money manager that is holding cash. And, invariably, if you sit on cash, you are going to be early, like we are this year. You are going to be early, and you are going to miss a little bit of a run up. But it is really the only way that we know to produce above-average returns over the long-term. You have to be early. It is better to be early than even a little bit late. We have heard you say that often. Especially when the market reaches extremes, you have to be preemptive.

I talked a little bit earlier about the low-volatility environment. We are not predicting this is going to happen or happen right away, but we could very well have a sharp drop like we did in October of 1987. There is no way to get out of the way of something like that unless you are preemptive and hold a large cash position. So we would urge people to really think about holding a core position in cash and waiting to deploy those assets at a better time.

If after listening to this podcast, you find yourself interested in connecting with Bill, Mike, John, and the rest of their team to learn more about their advisory services, please use the form here to do so.

Transparency note:  As a result of our public endorsement, Peak Prosperity has a commercial relationship with this firm. The details of this relationship are clearly presented in writing during the referral process -- but the punchline is, our relationship does NOT result in any increased fees to those who become clients.

cheers,
Adam

It should go without saying: this discussion should not be construed as individual financial advice by those listening to it. The content should be taken as informational and educational in nature only. Investment advice must be tailored to your specific personal situation (which Chris and his guests are obviously unaware of) and should be obtained directly from a financial adviser you trust. Before acting on any of the statements made in this podcast, we advise you do just that.

Click the play button below to listen to Chris' interview with New Harbor Financial (43m:29s):

Transcript: 

Chris Martenson: Welcome to another Peak Prosperity podcast. I am your host, of course, Chris Martenson. Here is the question: Have the equity markets stopped? I know that question is on everyone’s mind, but the real action, as always, is in the bond market, where we might ask the very same question: Has the bond market topped? As I have been fond of writing and saying recently, if you loved rising equities coupled with falling yields, you're probably going to hate the opposite. There are a lot of reasons, fundamental, technical, and related to marked-to-market sentiment to suspect that the fun ride of every higher equity and bond prices is over, at least for a while.

Today, I am pleased to be speaking again with some of the team at New Harbor Financial. That is Mike Preston and John Llodra, who will help us understand today how a disciplined approach to investing can make all the difference when markets wander into extreme territory. Before we get started, I’ll make it clear that Peak Prosperity has a commercial relationship with New Harbor Financial, one in which fees are shared on referred accounts. It is important to note that this arrangement does not result in any increased fees charged to the end customer. You are charged the same as if you walked in through the front door. All the details in this arrangement are provided clearly in writing during the referral process if we get to that point.

Welcome, gentlemen.

John Llodra: Thanks for having us today, Chris.

Mike Preston: Thank you, Chris.

Chris Martenson: Great. So let’s start from the outside in – Fed policy, and I guess everything is hinging on Fed policy. Certainly the Fed governors or chairmen or people open their mouths and the markets swoon or gyrate or up and down, all of that. But really, what the Fed is trying to do is prop up all the prices of financial assets, including real estate if it can, to create this wealth effect. From where I am sitting, it looks like – what are we, six years into this experiment? There’s not a whole slew of really convincing data that the Fed has been successful. Tell me how you see this world today.

John Llodra: I will be happy to kick us off with that topic. The Fed has done a lot of talking about their objective to jump-start the economy through job growth and GDP growth and whatnot. Really, from our perspective, it has been a very thinly veiled guise for incenting folks to flood into risk-based financial assets. In effect – and we do not what to beat this to death – we actually have a game here in our office. Once in a while, we will turn on CNBC and see how long we can get before someone mentions a Fed, usually in a bullish positive light.

We actually think the Fed has done potentially tremendous harm to the function of the financial markets. It really comes down to the fact that they have become such a huge factor in frankly one of the largest markets in the world – the bond markets, U.S. Treasury, and mortgage-backed bond markets. And, have had the effect, through both their purchases of bonds and their near 0% interest rate policies, of driving interest rates down and prices up on bonds over these last several years such that the forward return has been assumed to be quite pitiful for most investors.

What that has caused is folks to essentially flood into other risk based assets - like stocks, like high-yield or junk bonds, like real estate – and basically get bullied out of safer assets that many folks believe they should be in. We think there has been a huge amount of artificiality priced into markets like the bond markets. Consequently, we feel that almost in a mirror-image kind of way, there has been a huge amount of artificiality priced into things like the stock market. Think about markets and equilibrium, most are going to flood from one asset class to another when the return prospects are greater in those other asset classes. So if you essentially have cash earning zero, in a macro sense, the Fed’s policies have caused folks to flee into other asset classes such that their risk-adjusted return prospects have also been driven to zero. So, almost uniformly, we feel that most, if not all, asset classes have been driven to essentially zero or near-zero perspective returns from this point in time.

Chris Martenson: So here we are with poor returns, at least on a risk-adjusted basis. And looking at the market action recently, we have seen both equities falling and bond prices falling at the same time, and no real action in the dollar to sort of support or explain those moves, so they seem real. The question becomes, have the markets topped, and where are we in this cycle? We are pretty long in the tooth in this particular bull market advance. What are your views there? Is it time to become more defensive than usual, or is this the time to become really defensive?

Mike Preston: I will take a shot at that one. It would be hard for us to find a money manager that would actually have the credit to go out and say the market has topped. Frankly, we thought the market was risky a year ago, and it kept grinding higher day after day, month after month. We do think the market is at or near a top, as we said there in August of 2013 – mid August. The market went up to around 1707 on the S&P. Currently it is right around 1655. The market probably has put on a top at that level. Of course no one can guarantee that to be the case. Even if the market goes higher than its previous high at 1700 or so, it is unlikely that these gains will be durable. It is unlikely that these gains will be able to be kept by most people, and that is really the point.

We as money managers want to take risk when risk is likely to be appropriately awarded by durable gains over the long-term. When I say long-term, I mean over a period of several years – a full market cycle, if you will. So, when answering that question, we really have to build a case. The case that we are trying to build is, should we be bullish, or should we be bearish? Is this a time to take a lot of risk, even leveraged risk – going long to stocks, or that is betting stocks are going to go up? Or, should we be pulling back or pairing back our risk by moving more and more into cash? In building that case, really, we have to take a look at a lot of different sets of data. There is really good people out there putting together really good data that is not hard to find – from your site to some of the other sources we are going to give due credit to here in just a minute.

The bearish case has a lot of data available that you can look at the hard and fast numbers and say geez, you know, things aren't as rosy as CNBC would like us to believe. On the flip side, the bullish argument, it is hard to find concrete data to back up the markets going higher from here. So really what I would like to do is just spend one minute or so defining secular stock-market cycle.

When I say secular market cycle I’m talking about 10-20 years in length. Here, there is a good source called Crestmont Research. It is put together by a man named Ed Easterling. It is crestmontresearch.com. There are lots of neat charts and graphs on there. There is a number that we use and we find useful. He puts together a nice graph show in secular stock-market cycles over a long period of time. You can see by looking back over the last 100 years or so that stock markets alternate between bull markets (that is, markets going up) and bear markets (markets going sideways to down). They alternate every 10 or 20 years. So really, between 1900 and 1920 was a bear market, only ended after World War I. Then 1920-29 was a large bull market. And 1929-1945 was a 16-year bear market. And 1945 all the way up to 1966 was a wonderful bull market. The 1950s actually showed a gain greater in the stock market than the 1990s showed. Then 1966-1982 was a secular sideways bear market, and 1982-2000 was once again a bull market. So it is kind of an on/off type thing.

Between 2000 and now, 2013, we have been in a secular bear market. The question on the table here is, are we at the end of a secular bear market? The S&P has gone nowhere literally in almost 14 years, with two declines of 50% along the way. So the real question is, are we about to break out into a brand-new secular bull market here? Or are we simply midway or more along the path of a secular bear market – one that could have declines of 40-60% or even 70% lying ahead? We think, for a lot of different reasons, we are still on the secular bear. A lot of folks out there are saying the opposite. CNBC and the financial press think the secular bear market is over. We’ve heard people say this is like a 1982-type moment, that the secular bull is back. And, we do not think it is.

Chris Martenson: Let’s talk about some of those fundamental factors that really will support the defensive in this particular point in time. I will say that the one piece of evidence I have heard on the bullish side goes something like this: The Fed won’t allow the stock market to go down, which is shorthand for saying that the Fed stands ready to print as much as necessary to keep prices elevated.

But that’s not a really fundamental value sort of a play to speculate whether the Fed is going to dump more money in or not. Let’s talk about these fundamental factors for a minute. What do we have? Earnings come up all the time. Corporate earnings are at all-time highs, and there are projections that they are going to go even higher.

John Llodra: I’ll take the handoff there. So yeah, if you look at these cycles that Mike referred to, there are very clear signposts that one can look back at and say, these were glaring indicators that told us we were in the neighborhood of the end or the beginning of a given bear or bull cycle. Some of the most reliable signposts that one can look at are valuations – how expensive as a function of earnings are stocks, individual stocks, or the market in general, and also things like interest rate or inflation trends. So, let’s say, each of those in turn. One of the most common metrics that folks will toss out in terms of measuring the valuation of the market is the so-called PE ratio – price-to-earnings ratio. Pretty simple concept; the numerator in that fraction is the price of a stock or a price of the stock market in general – like the S&P 500 – and the denominator, the “E”, is the earnings of the company or the market in general.

So, it sounds simple enough, but the devil is in the detail. The “E”, the numerator, is where most of the mischief happens. If you put an “E” under there, an earnings that is misleading or artificially high, you are going to come up with a PE ratio that is misleading low, leading one to conclude that the market is undervalued. The market has room to go up from here. That is really where much of the mischief has happened of late. If you look at corporate earnings right now, it is somewhat of a conundrum to most folks, but they are at very much peak levels. If you look at over a long period of time, clear as day, corporate earnings have risen over time. That’s why the stock market has risen over the last century plus with very strong results.

But just as certain as that long-term rising trend has been a pretty defined and cyclical pattern piece and troughs around that trend line. We happen to be right now in an area that is one we call a peak of that cycle. Most analysts will use a single year of earnings estimate, usually Wall Street’s forward operating estimates that are generally high and biased to the high side. If you use a peak number in that denominator, you are going to come up with a much lower PE ratio than is reality.

Professor Robert Shiller of Yale came up with a pretty simple but novel way to adjust for that. It is the so-called Shiller Adjusted PE ratio, which looks at the prior 10 years and averages those and adjusts them for inflation. And when you do that, you smooth out the unintended effects of that cyclicality in earnings. So if you look at where the Shiller Adjusted PE Ratio has been in these major bull and bear market cycles in history, basically, shrewd durable bull markets start with a Shiller Adjusted PE Ratio in the 5-10 range. And they typically end and a new bear market begins when the Shiller Adjusted PE ratio reaches 20-25, in that ballpark. Right now we are between 24 and 25 on the Shiller Adjusted PE ratio.

So, valuations have been a very clear indicator of major market bottoms and tops. We are about as extreme on evaluation as we have ever been, with the exception being the Tech Bubble of 2000 where the Shiller Adjusted PE’s got up to about 46. Not too many folks are willing to say that was logical or will ever be repeated again. On a valuation standpoint, we are very much on the high end of history, which usually coincides with the beginning of a new bear market rather than a new bull market.

We can talk about things like interest rates and inflation, just quickly. Inflation – right now we have somewhat moderate, stable inflation. In fact, that is much to the Fed’s frustration. They want to stimulate a little more inflation than they are getting. But, history is showing that when you move from a period of stable inflation to either high inflation or low inflation – meaning deflation – that has tended to be a horrible time for the stock market. So either way, the Fed seems to be worried about two scenarios here: deflation and longer-term inflation. Either of those moves has traditionally been associated with very horrible results in the stock market.

Chris Martenson: In there, you mentioned something else, which was the interest-rate trends. That is certainly something that has caught my attention a lot lately, because you want to talk about the things that the Fed wants and does not want. The interest-rate trend, which has been worldwide – watching the long-term interest rates of those ten-year bonds and higher in a bunch of sovereign nations have really risen a lot since – depending on which country we are talking about, it is early May to early June. So it has been a couple of months. It is a fairly durable phenomenon, at least by recent standards. And it has gone so far that people like Pimco have tweeted out that that’s it. We hit a long-term secular low in interest rates and what was that, maybe 1.6 on the tenure? It was somewhere in that zone. And that’s it. So they are just heading up from here.

Talk about the relationship of interest rates and stocks or equities in this case.

Mike Preston: Sure, I’ll offer a quick response to that Chris. The ten-year note, the world watches the yield on the ten-year U.S. Treasury Bond. It really drives the interest rates on so many very important vehicles, not the least of which is home mortgages. Last year, in roughly August of last year, the ten-year bond yield bottomed out at 1.39%, about 1.4%. And most recently, as I look at it right now, it’s at 2.8%. So that is an increase. It is really almost a doubling, actually, if you look at it that way. It really literally is a doubling from about 1.4% to 2.8%, or to put it another way, an increase of 1.4%.

This has had the effect of driving mortgage rates up over a point. Average mortgage rates now are up around 4.6%. They were in the mid 3%’s not too long ago, maybe about six months ago. As interest rates rise, it essentially is toxic for the economy and the stock market, because business owners and consumers are less likely to borrow and reinvest. Homeowners are less likely to borrow and build that addition or move to a bigger home. Companies are less likely to borrow and finance the purchases of other companies, even investing in new plants and equipment. So, it’s just something that everyone is watching. It is something that we are watching closely. Frankly, it is one of the hostile syndromes that John Hussman – another person that we admire and read quite closely. He has a site, hussmanfunds.com – he talks about a toxic syndrome, a more dangerous syndrome in the stock market, and one of those is interest rates rising quickly over the past six-month period. That’s exactly what we are seeing.

This is a huge warning flag. You are right, Bill Gross tweeted the other day, he said we have got no one to sell to but ourselves. All assets are inflated. So, certainly it has got us very, very cautious and very defensive.

John Llodra: Chris, just adding to that quick, so many of the fairly unsupported bullish arguments have been well, because bonds are yielding so little, stocks represent the best game in town. Now the interest rates have picked up – still moderately, but significantly relative to where they were – that argument starts to lose some weight. In fact, looking at where the ten-year bond is right now, just a tad bit under 2.9%. If you look at some work done by folks like John Hussman that Mike just mentioned, and GMO (Grantham Mayo van Otterloo) – a big money manager based out of Boston – they both have very good reliable track records in projecting perspective returns in the stock markets. John Hussman estimates that ten-year forward returns in the S&P 500 are roughly right in line with that 2.9% that ten-year bonds are currently priced to yield. GMO actually, for the seven-year horizon, actually projects a negative return for most stocks.

All of a sudden, the modest pickup in yields on bonds really challenges the perspective return prospect for things like stocks. So they are no longer the slam-dunk best show in town relative to artificially low bond yield.

Chris Martenson: We saw that virtuous cycle on the way down in yields where the lower yields went, the more attractive stocks became. So really that was a plus, with all the ample liquidity provided by the Fed, et all. You had a really virtuous cycle where both bonds and stocks went up, and of course that was on the Fed game plan and other central banks’.

So here we have the opposite where we are seeing, on some of these days, red on stocks and red in bonds at the same time. So there is all this selling going on. That clearly says something about market conditions and whether there is enough liquidity to be supplied really to keep everything elevated where it is. And potentially, the answer is no at this point.

One of the things that I think the Fed has been counting on is this idea of this wealth effect that we started out this podcast with, and this idea that the stock market, it is the same thing as the economy, right? As long as equities are rising, I guess the tail will wag the dog and the economy will follow along. Do you take exception with that?

John Llodra: Your recent piece a couple days ago very eloquently spoke to that. If you look at where the rubber meets the road, jobs recovery, look at GDP growth. You know, it is clear that after five to six years of intervention here, the results that we are so somewhat sought and promised are not being delivered. We are having pathetic rebounds and job recoveries and GDP growth. So I think the evidence speaks for itself.

The reality is that most folks forget that the stock market is a forward-looking machine, if you will. Let’s not forget the stock market began rallying back 2009. We have had a pretty long rally here. And for folks to now be saying if the economy starts to get better, that means the stock market will go higher. A lot of that possible future improvement is already more than priced into the gains and the stock market over the last several years since the 2009 low.

Most folks fail to realize that to stock market usually rebounds when economic news is getting worse, not when it is getting better. We think that story is more than played out to an excessive level. Even with the improvements in the economy, we are likely to see a major pull back in the stock market.

Chris Martenson: Well, buy the rumor, sell the news is an operative phrase that I learned to trade by. Meaning, the stock market is there projecting if the economy is going to recover, and then when it finally does, it has already priced that all in – it has already bought that rumor, and the news itself may or may not be what you are hoping for. If the Shiller Adjusted PE’s are right, boy, you know –

unless you are expecting us to go back to 2000 levels on the Nasdaq and get price earnings that are in the 40’s and 50’s, you know that is where you are going to get a market doubling. Otherwise, we are going to have to have the earnings really double.

And of course, they are at not just highs, but at levels that have really never been recorded before on a percentage base of the economy. All of this hinges all of the euphoria around the fundamental side on the bull case hinges on the economy really taking off. And each successive GEP release is eh, you know, 1%, 1.5%, eh, you know, this is not taking off. So, that part is not happening.

Well, those fundamental reasons I think are – you know, that is one thing you guys are looking at. The sentiment is something I used to track when I was trading. Tell me how you track sentiment and what you are seeing there.

Mike Preston: Sentiment is really overwhelmingly bullish across the board, and there is a number of different ways to track it - no really exact science. There are a number of polls out there, like National Association of Investment Managers and the AAII poll. A number of these and more polls of investment managers are showing really record complacency, really record lows in the number of bears. When I say lows in number of bears, I’m talking about people that think the stock market will go down. The respondents of people that think the stock market will go down are less than 30%, just to throw out an average number. So there is really a dearth of pessimism. Really, stock markets take off and launch into the multi-year secular bull markets in social environments that are washed in pessimism. They do not take off to new secular bull markets when everyone is bubbly with optimism. There really are not that many people that are negative or paying attention to the data that should make them be negative on the stock market.

Investment managers – you can just take a poll of them, and again there is a lot of different data that you can look at there. Simple things, even just like magazine covers, for instance. Magazine covers – on April 22nd, on Barrons’ cover there was a bull jumping on a pogo stick. He had jumped right over a bear who was cowering in the background, and it said Dow 16,000 on the cover. There have been a lot of these types of magazine covers lately.

This is not an environment that you want to see, really. If you're a bull, you really want to see negative covers. Generally, when you have got magazine covers that are so positive you have a social mood – and that’s really what we’re concerned with, is social mood – you’ve got a social mood that has reached a peak in terms of optimism.

When social mood changes and then reaches a realization phase that maybe things are not as great as they thought they were, that’s when you get very fast, very vertical elevator type drops to the downside that are unexpected. So that’s what we are concerned about.

Chris Martenson: One of the things I track, Mike, is also looking at the New York Stock Exchange level of margins – margin meaning that people, investment managers, others have gone out and borrowed money in order to go along or invest in stocks. From my point of view, by the time people have already borrowed to go long on stocks, they have probably done all they can do, or they do not have much further to go in that run. Are you tracking that, as well?

Mike Preston: Yes. Margin debt is very near record levels, at or above where we were in 2000 and 2007. It is not enough for many speculators to be 100% invested. They want to be 200% invested, betting on the stock market going up or more. That is generally a terrible time to be investing for the long term. I’ll just go through some of the things we are looking at. Insider selling – I’m talking about corporate insiders – they are selling almost 10 shares, 9.2 shares at last check; they are selling for every 1 that they are buying of their own company’s stock. There are reasons that corporate insiders sell, of course, and they might just need the money for something else. But when you get almost a 10:1 sell-to-buy ratio, it is something to really pay attention to.

Interestingly, there is one sector of the stock market that is nearly the opposite of that, and that is gold and silver miners. Corporate insiders at gold and silver mining companies are buying ten shares for every one that they are selling. That is pretty interesting, in light of a gold and silver mining sector that at its worst was down almost 70% year-to-date this year. It was a brutal bear market for that group. But those insiders are doing the smart thing, at least in their eyes, and buying stock.

Really, this time is different, as John, I think, mentioned earlier in the conversation. Everyone thinks this time is different. You know, they say the Fed has got our back. This is probably going to go down as being called the Fed bubble or the Bernanke bubble, very similar to the housing bubble of 2006 and the tech bubble of 2000. As quickly as other things, stock equity mutual funds have record low cash, down to about 3% of holdings. Typically they hold 5 or 6%, but the last couple of months they have been down around 3%. There have been record retail in-flows of cash into equity mutual funds over the last couple of months as well. And, you couple that with everything else we are talking about, valuation and so forth, it paints a really disturbing picture.

One last thing I might mention is the volatility. The volatility of this market has been very low. The volatility is measured by something call VIX. Recently that went under 12, which is right near a multi-year low. It just shows how much complacency there is. This market does not move a lot day-to-day. Sometimes it is like watching paint dry. But, it is that exact type of market that sometimes is the most dangerous. It just kind of lulls people to sleep. In the midst of the hostile environment that we are in, it has us a great deal in cash and just kind of sitting on our hands and waiting for better opportunity.

Chris Martenson: All right, well, let’s talk about if we peel back the covers on equities for the moment. You peer in there and look at what is going on. You mentioned what happens when you look into insider selling, if you peer under the covers. And note that gold and silver miners, for some reason, they are buying ten for every one they are selling. When you peel back the covers, what are you seeing in there technically that might support a bearish versus a bullish case?

John Llodra: Much, much on the sentiment side of things and technical side of things. If you look at the gold and silver miners, they are almost the exact opposite of what is going on in the broader stock market. There has been no more unloved asset class than the gold and silver miners over the last couple quarters. When you think about markets in general, they operate on the simple laws of supply and demand. You know, frankly, if there are more people wanting to buy than wanting to sell, then the price has got to go up to tease out more sellers, and vice versa. If more people are wanting to sell than people willing to buy, well, the price has got to drop to entice more buyers to come in.

If you look at technical and sentiment readings on the gold and silver miners, almost uniquely they have been in rock bottom levels rivaling the negative sentiment that we observed both in that sector and in the broad stock market in general back in the depths of the decline in 2009. So, frankly, we are just seeing lots of signs of an exhaustion of sellers in that sector. From a technical standpoint, technical analysis really comes down to trend following and momentum strategies. Don’t ask the question of why are things going up or down, but are they. And what are buyers and sellers doing to carry on those trends?

Basically, there have been lots of signs that some of the selling pressure has abated in the gold and silver miners. We’ve seen at least in the near term here a quite sizable balance off the bottom, and almost the opposite is what we are seeing in the broad stock market at this juncture.

Chris Martenson: What is it you are seeing in the broad stock market there, in terms of the technical factors?

John Llodra: It is very early. We are not willing to say the top is today or last week. Topping processes usually take time. But, what you start to see in broad topping patters in the stock market is a lot of different things, but one very hallmark sign is a narrowing of leadership. If you can almost imagine, you know – obviously we see the news every day, the S&P 500 did this or the Dow Jones Industrial Average did that, that talks about the index in general. When you look underneath those indices, though, and look at how individual stocks and those indices are behaving relative to the direction of the index, what you oftentimes find at major tops is that fewer and fewer stocks are trending higher while the index itself is going higher.

In very extreme events, you might have a small handful of stocks carrying an index higher at the same time that more and more stocks under the line of that index are turning lower. We are starting to see that in some things. For example, for the last couple of years there has been record low dispersion between different sectors of the economy in terms of stock market return. That has basically spoken to the fact that it has been an all-risk-on or all-risk-off – mostly all-risk-on – environment for the last few years.

We are starting to see some dispersion. There actually are some sectors that are starting to outperform or underperform other sectors. That is a sign that there is not this uniform bid being placed under all stocks of every stripe. We are starting to see things like the often-talked-about Hindenburg Omen. We are not particularly watchers of that one indicator, but that speaks to the same time many stocks are making all-time highs and there are also a large number of stocks making new lows. It speaks to dispersion, a faltering of many stocks at the same time, and that fewer stocks are carrying the market higher. Those are just some of the things.

One analogy we like to use in technical analysis is that of a rubber band. The markets generally stretch in either direction like a rubber band would. They oftentimes overstretch in either direction too much, and over time things revert back to the mean – meaning the rubber band snaps back to the center point, if you will. If you look where stock markets have been across the board for the last several months, and in fact even the last couple of years, uniformly they have been very much overbought statistically on the upside, meaning they have stretched the upside far faster than is normal on almost every time horizon, whether you are measuring it on a short number of weeks or many months. That is typically the sign of a market that is getting towards the tail end of a move higher. It is kind of a last act of desperation before the path of least resistance becomes the sellers wanting to get out for whatever reason.

Chris Martenson: All of this with $85 billion a month pouring in still. So if we add all this up, we’ve got some technical factors, supporting views, sentiment, and then the fundamental reasons that you think it is time for caution. So Mike, starting with you, how do you invest in these times? How are you helping to guide people through what you consider to be fairly risky environments where returns might even be negative?

Mike Preston: Yeah, at least on the short term, we do think over the next couple of years returns are likely to be negative in the stock market. It is a very challenging time, Chris, to say the least. A very challenging time for us as money managers to continue to do what we think is the right thing. We would urge people that are listening to this podcast, you really have to avoid the urge to just do something. Everyone wants to do something. They always want their money to be working for them. They want to be in this stock or that stock or that bond or this commodity future.

Sometimes – especially in an era like now where all assets pretty much have been moving in tandem and they are all priced off a risk free rate of 0%, so they are priced to return very poorly at present times because the risk premium has been stripped away from them – you really need to just think about sitting in cash or allocating a good portion of your portfolio to cash. Cash really, truly, is king sometimes. It is an investment decision to sit in cash. If you do not have some cash, you are not going to have the ability to buy at better valuations. Most of your long-term success as an investor – and this applies to money managers who have been hired to invest money for people – is going to be dictated by how well you stick to your discipline and where you deploy money and where valuations are at. So, you really have to think about patience, and that is a hard thing to do.

We as money managers are sitting on a very large amount of cash, in some portfolios over 50% cash. That is really something that not many money managers like to do. That is not something that many retail investors like to do. But money managers have something called ‘career risk’ where they are constantly having to make sure they are staying ahead of or keeping up with the various indices. They are really afraid to hold onto cash, because holding a large cash position is precisely what threatens their livelihood more than anything. Clients do not sit with a money manager that is holding cash. And, invariably, if you sit on cash, you are going to be early, like we are this year. You are going to be early, and you are going to miss a little bit of a run up. But it is really the only way that we know to produce above-average returns over the long-term. You have to be early. It is better to be early than even a little bit late. We have heard you say that often. Especially when the market reaches extremes, you have to be preemptive.

I talked a little bit earlier about the low-volatility environment. We are not predicting this is going to happen or happen right away, but we could very well have a sharp drop like we did in October of 1987. There is no way to get out of the way of something like that unless you are preemptive and hold a large cash position. So we would urge people to really think about holding a core position in cash and waiting to deploy those assets at a better time.

Chris Martenson: Absolutely. So, if we are looking at where the markets are really standing right now, obviously timing is a really difficult thing to get exactly right in this business. It is impossible really to do it more than a couple of time randomly in a career. You have to pick your moments, and you do that by assessing the risks such as they stand. We have talked about all of the risks that are out there, but for somebody listening to this, sitting in cash is one thing they can do. How else do you really go about being defensive in an environment where everything is overpriced?

Mike Preston: Chris, I can offer some perspective on that. You know there are a lot of different things. Again, cash is one of the cheapest forms of insurance you can find. But there are other tools. For example, we make extensive use of options in our portfolio management. I do have to disclose that options can be fairly risky tools if not fully understood. There is a full disclosure document that anybody trading in options needs to sign off as having read. But, basically things like putting call options can be very effective in helping to mitigate untenable risk. For example, buying put options is very much similar to buying insurance on your home or auto. You essentially pay a premium in return for some downside or insurance protection. I do not want to get too much into detail there, but it is a way to effectively buy insurance on your financial assets.

Selling call options is a way to generate additional income that can serve as a return enhancer in a flat or sideways market, but also can be an important form of downside protection – albeit limited to the amount of the option premium you take in – but nonetheless, downside protection in the event of a move downward in the particular asset you sold call options against. Good ole diversification.

We believe in diversification; not in the context of most traditional managers who believe in diversification in the form of having a pie chart with 30 different slices held constant through whatever market environment is thrown at them. We believe in diversification in a more tactical sense – combining some trend falling with technical indicators that can diversify out of currencies to take away the currency risk, even amongst asset classes. For example, being a bond investor, but in the right kinds of bonds, is important. Most bonds have lost money this year, but generally speaking, short-term, high-quality bonds have fared much better than things like long-term municipal bonds or long-term treasury bonds or high-yield corporate bonds. So, a lot of asset allocations in the sense of tactical adjustments given the risk and rewards, but also selection within sectors based upon the particular set of risks or opportunities that are in play.

Chris Martenson: Well, let’s talk a minute about the asymmetry of risk. If you do suffer a bear market decline – and Mike, you mentioned before that they tend to take back what they gave in the bull market in the first part. It is hard to get your arms around it sometimes as an investor, because a 50% loss, that really hurts. But to make it back, you need 100% gain to get back to even. It is really difficult to make those gains back, particularly if you think – if you look at the analysis of GMO and Jeremy Grantham’s work there where he is talking about the idea that we are facing a long-term structural, maybe even negative, real return environment. That is a really difficult place to go out and maybe think about making any sort of returns in. But, if what you have just articulated with on the fundamental side is correct. Basically, these people are in the business of lining up for very low returns against a very high-risk environment, where the risks are not symmetrically stacked for you.

If your approach, then, is to take that risk when you think it is really likely you are going to be durably rewarded, I think is the term you used there, tell me how you go about really constructing a portfolio then, or how you think about investing for somebody in this environment.

Mike Preston: Sure. Let me see if I can elaborate a little bit on that. It really is all about discipline presently, Chris. I would like to say that there are some really fancy things that we do, or that we can pick the right stocks, or we can pick undervalued stocks in lower-value market. Sometimes that can be done, but by and large, we are picking our spots and being tactical, if you will. Again, holding a large amount of cash is very boring, but something that we think is very important. The patience here cannot be understated. Sometimes you have to wait for the opportunity, and that time you are waiting might be a year or two or even more.

Just kind of building on what you just mentioned about interest rates increasing and become more attractive to investors, John was talking earlier about how the ten-year note has a yield now of 2.9%. That means if you invest money at today’s prices, you are guaranteed – as long as the U.S. government stays solvent – to make 2.9% yield over the next ten years. Sure, the value of the bonds could fluctuate a little bit from time to time if you want to sell them before the ten years is up. But, compare that with the S&P 500, which is presently, again, as John Hussman calculated, is probably priced to achieve somewhere around 2.8 % or 2.9% over the next ten years, with at least one 40% to 60% drop along the way. So, that is really what is so torturous about right now. The spots that we like are things like we talked about earlier, where we are seeing insider buying, where we are seeing really depressed valuations, gold and silver mining stock. This is something that even after the most recent bouts, we think there is still compelling value in that sector.

Owning some U.S. and even sovereign debt that is very, very short in the maturity, say three to five years, can add some value. We like to really limit the doses there. Really, other than that, we are more tactical on pullbacks in the market. I do not really want to say we buy the dip, because I really kind of hate that phrase at this point, we all do. But we might tactically add a little bit of stock market exposure on a 10% or 15% decline and hedge you with options. But at the risk of being redundant, we really have to hold a lot of cash, and we have been that way for probably 12 to 18 months; we have been between 30% and 60% cash. That remains.

Chris Martenson: Fantastic discipline that you are showing there. Of course, one of the reasons that we were drawn to working with you gentlemen over there at New Harbor is because of that discipline. I am a believer that when markets are insane, you need as much sanity you can get. We have got a Federal Reserve that is interventionist. It is trying things that have never been tried before. Much of history suggests that it is never different this time. It is always something that returns to the mean. We are so far above the mean in so many dimensions that a betting person – I feel like we are standing in front of a roulette wheel that has got only three red squares and a bunch of black ones, and you kind of know where you want to have your money placed down on the table at this point in time. This all sounds very rational, very sensible.

I hope anybody listening to this has enjoyed the conversation. As you heard, there is a lot of depth here, and there is a lot of discipline. And that is why we have chosen to work with the people at New Harbor. Mike Preston has been talking today, and John Llodra. Thank you so much for your time, gentlemen. I do appreciate it.

Mike Preston: Thank you for having us, Chris, and thanks, folks, for listening.

John Llodra: It has been a pleasure, Chris. Thank you for the opportunity, and thank you for listening.

Chris Martenson: And, I hope we get to do it again soon. So, so long for today. This is Chris Martenson signing off for PeakProsperity.com.

About the guest

New Harbor Financial

Founded in 2005, New Harbor Financial Group is a privately owned investment advisory firm that provides risk-managed investing and financial guidance to individuals, families and institutions. Located in Leominster, MA, we serve clients throughout New England and in many other states across the country.

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40 Comments

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
A Joke.

I was going to make a joke about investing in oil fracking. But it would neither be funny nor wise.

My attention was drawn to a comment that companies (or economic entities) are showing record yield. I conclude that this was where the money printed is appearing. If this money escapes into the wild then all our money is going to become diluted.

So. What to do? I will keep enough folding stuff on hand, then invest in my preps, invest in my business venture and then consider buying a piece of the gold mine up the road.

Gold looms esoteric in my mind. There is too much reliance on it's historical role.

With the collapse of western civilization and the results of  Limits to Growth curves I look askance at anything hypothetical. 

Thanks a lot fellas for showing me your models of reality.

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1214
Can you sit safely in cash?

I understand the large chance of downside risk in either bonds or stocks at this point so the logic of holding a large cash position, despite likely negative real returns, seems sensible while awaiting better re-entry points into the markets in the future.

However, in the age of the universal 'bail in' model of bank recapitalization (ala Cyprus), how does one safely hold cash? Do we put it under our mattresses or risk it in the next MF Global brokerage scandal or diversify the cash holdings in other ways to try to keep the risks to that asset class reduced?

Mark

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Fun and Games on Wall Street.

The Shah gives us another good reason to stay out of the Market.

Goldman's computers had a whoopsie moment and lost $100 000 000.

Chump change really, but worth reading about to understand what the Left Brain hath wraught.

yogiismyhero's picture
yogiismyhero
Status: Silver Member (Offline)
Joined: Jun 28 2013
Posts: 173
Rational and sensible

Agreed.

yogiismyhero's picture
yogiismyhero
Status: Silver Member (Offline)
Joined: Jun 28 2013
Posts: 173
Hi Mark, always great to read your thoughts...

Mark, I would like to express what I have done with my cash to keep it out of the system, perhaps benefit from an income tax perspective and have it at the ready when needed or wanting to put it back to work.

I will keep it brief and allow others to chime in with how they keep cash out of the system but also ways they protect it.

I have prepaid my property taxes. I have large stores of fuels that will be used up as a set amount can be determined, and I can use discounts that I know are available to me of anywhere between $.40 and $.80 cents a gallon up to 35 gallons and potentially 70 gallons a month. I know I will need goods and services and will look to pre-pay for these services in advance. For instance, I may pay in advance for oil changes and other services with reputable companies here in my community where I have been intimately involved with these Folks over many years. Often getting a 10% discount just for paying in cash.

These are just a few ways and I have many more that I use to manage my cash, get a bang for my buck in the process and in no way reflects all the little things I can do with cash in the short term to keep my cash out of harms way and actually make a buck as holding more fuel clearly indicates.

I would really be interested in ways some of you Folks manage your affairs out to no more than 6 months to keep yourselves ready to deploy cash and actually get a return on your cash while keeping it safe.

Lastly, I do keep a fair amount of cash on hand, and while a risk I feel I can defend it rather well.

BOB

ferralhen's picture
ferralhen
Status: Silver Member (Offline)
Joined: Oct 14 2009
Posts: 151
i think any day is a good day

i think any day is a good day to show some disipline.

work --the best way to increase wealth that i have found.

buying "stuff" the best way to lose wealth.

i see things as so complex and fraudulent right now, that the concept of safety is not in this picture.so why look for it? i'm not a big risk taker.

i let go of the idea to accumulate alot of paper wealth after the dot com crash. i switched to concept of having a low cost lifestyle, one that needed very little cash.

i have tried to set up a home that is extrememly inexpensive to live in. i've spend the lions share of my wealth:  building , buying and owning outright my grounds, tools, energy, entertainment, food, heat.etc..

property taxes around $200/month and maybe $100/mo for beer!

i easily can live under $500/mo.right now.

i like small bills(under $20's)(which must be kep tin an airtight/watertight container....us bills disintegrate over time if not protected). i built a vault when i built the house. it doubles as a tornado shelter and root cellar.

gold is valued in dollars and dollars are valued in what? debt? that's too crazy for me to think safety.

gillbilly's picture
gillbilly
Status: Gold Member (Offline)
Joined: Oct 22 2012
Posts: 423
Cash position.

I've had 90% of my investments in cash since the beginning of April. I haven't thought twice about it. I will wait this experiment out for awhile. What is difficult for me to understand is that this experiment of QE is something different from our past economic models, so it is seems equally difficult to me to understand how to apply the economic models from the past to  this situation. Maybe it will play out in relation to existing models, maybe not? Maybe the top of the market will come soon, maybe it will come in a year or two?

It appears to me that the level of planning that exists (ed) in the vertical integration of the industrial corporation is being applied with steroids to our monetary policy, hence, the intentional elimination and controlling of market forces in the interest of planning and power is first an foremost.  Coercing manager's cash positions to seek higher risk shifts individual's savings to corporate coffers and I'm sure the intention is to push up corporate savings for capital formation. But corporations are not investing, rather they are letting the money pool, waiting for things to shake out, or worse just pocketing it through accounting tricks. This only puts more pressure on the Fed in the interest of planning to stimulate more, and around we go.

What a predicament! Our system has always punished individual savers in the interest of corporate investment. In the eyes of "system," we as individuals are consumers first, savers last. The paradox is that if we consume more, savings is increased...or so the theory goes. Hmmm, should we be having a different conversation? Maybe this paradox isn't a fact when the markets begin to hit real limits of resources?

Having cash in and out of the house seems like a good idea. Having some investment in PM also seems like a good idea in respect to how the markets work. They are a couple ways for us as individuals to plan, as the Fed does, to minimize or eliminate the market forces on your own wealth/power.

Enjoyed the podcast. Thanks.

Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1938
A cheaper lifestyle, ferralhen?

A very good point! We should live as simply as possible. I just looked at my retirement investment portfolio (my husband's is mostly in cash, but some company stock.) Mine is in:

  • things to lower energy costs (insulation, clothesline, woodstove, efficient appliances, smaller car & less driving, CFL bulbs, solar hot water...)
  • things to lower utility & food bills (well, garden, canning, cooking from scratch)
  • things to lower healthcare bills (exercise, healthy food, enough sleep, mold control, natural remedies)
  • things to enjoy without going broke (musical instruments, printed books, friends)
  • and tools to maintain all of the above.

Those are my "investments".

Sustainable living cuts your cost of living pretty well, in my experience. It also increases your enjoyment and health. I was out of debt before I "invested" in any of this, Moving to an cheaper state and into a shared living space also helped my "portfolio."

Yeah, I have a few bucks in an IRA, but that's not my primary investment vehicle. Not even close.

Phaedrus the younger's picture
Phaedrus the younger
Status: Bronze Member (Offline)
Joined: Aug 21 2013
Posts: 60
Self-sufficient living & hard assets...

My wife and i began our journey over 20 years, initially to reduce our carbon footprint and lower energy lifestyle.  We were pleasantly surprised that we saw no appreciable deterioration in our lifestyle. 

Fast forward 15 years and we have ramped up our transition considerably.  Bought a small farm, built a strawbale house and got completely out of the market. We're meeting very cool people on the way.  

Despite all of the foresight and sense of urgency, we keep getting surprised at how hard it is for us to let go of the old paradigm.  We need to constantly remind ourselves why we're doing what we're doing and not to procrastinate!  PP,  Post Carbon Institute and The Oil Drum have all be consistant sources of inspiration. 

Carpe Diem!!

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1214
Now you are talking!

Phaedrus,

That is downright inspiring. I've been dreaming of building a straw bale house for years! My biggest problem is figuring out where I can locate it and when I can start it as life has me in a holding pattern in the wrong location for the next few years. We once had the right property but health and job crises landed us here, with a good job and health again but not in the right location for long-term planning. For now, we are trying to feed our daughter's dreams for the future before pursuing our own while prepping in place as best we can.

Following on Bob's ideas of prepaid expenses, we invest locally through a CSA to keep the veggies coming throughout the season and augment our modest garden.

I'm pursuing Wendy's investment strategy too though I am lagging badly on #3 of her list...

Mark

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 759
Thanks Wendy

Thanks Wendy, for another inspiring and down-to-earth post.  I appreciate your lovely contributions.  I am inspired by your list, and I need to work on doing a better job with healthy food, as well as a few of the others.   I currently drink two cups of coffee a day, so this week, I'll shoot for one, and eventually try to move over to black or green tea. My wife and I don't own land, so we can't to a lot of the things on your list yet, but we did harvest some linden tree flowers this year, to use for linden tea, and we're going to try to do more of this next year.

Cheers,

Hugh

ferralhen's picture
ferralhen
Status: Silver Member (Offline)
Joined: Oct 14 2009
Posts: 151
adding to wendy's list

things to lower energy costs:

solar panels that run a solar freezer(to store garden food not canned or dried), solar refridgerator(to keep that beer cold), solar fans, solar heat(my winter heat bills average $35/mo in michigan) 2 solar battery banks that can run my natural gas furnace or computer or anything else. 7 full cords of split red oak firewood , that an 85 yr old farmer gave me as a thank you for sharing my garden veggies with him. an outdoor kitchen area with wood brick oven, fire pit with cast iron cooking, i can cook with propane, charcoal, wood, or solar.

a 1000sq/ft house(with 1000 sq/ft walk out basement) with 6 in walls : R 25 walls, R40 attic insulation, with 25% windows on the south wall.

i use one of those $2.50 reflective camping blankets on the large window in the summer and it saves 20% of my cooling costs.

things to lower food bills and utilities..

trading with neighbors who have bees, chickens, cows, welders , large tractors---  things i don't have.

a 12 x 20 ft greenhouse that grows food, mostly salad every month but jan and feb.

dehydrator(i'm working on building a solar one now that i have the concepts forming)

an auillary shallow well, as i don't have the deep well solarized yet.

believe it or not, i'm on a bus route between a farming town and a larger city.tho for now my pickup is handy...(and costs around $500/month so my largest cost, that no longer is so necessary now that most things are in place) indespensible during the building years. trying to use the cheap energy while i had it to get things done.

things for healthy living

ditto wendy and i walk 3 mile /day 5x week on top of all the garden and yard maintainence, wood splitting etc chores. i took an hour nap for the first time the other day....wonderful!

music makes any heart sing, just sitting under the pergola in the outdoor kitchen(which has solar powered cd player), and looking out over the land and watching the deer romp, the sandhill cranes fly over head,the red wing black birds settling in the cattails for the night, and lets not forget star gazing...it's dark enough where i live to stargaze....the milkyway just mesmorizes me especially in sept

lastly a fire...either a campfire, or a woodstove at night when i am usually so tired all i want to do is sit and enjoy the stillness and the graditude of another day of life given and well lived.

it took me 7 years to build all this, 99% by my self. it can be done. i started when i was 53.

.

ferralhen's picture
ferralhen
Status: Silver Member (Offline)
Joined: Oct 14 2009
Posts: 151
forgot the garden

i have a 100 x 100 ft garden with massive compost pile. i use no chemicals, sprays --nothing but the compost which is made from wood chips, leaves and grass clippings. i do add rock phosphate some years and i rotate the area used and let some sit fallow for a year.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5155
ferralhen: Our Local Source Of Inspiration

It took me 7 years to build all this, 99% by my self. it can be done. i started when i was 53.

Ferralhen, what you have acccomplished is truly inspiring.  I would love to see your place and learn what has worked for you and what has not.

Yours is a perfect example of 'doing the next thing' as that's how such a well-outfitted place gets that way; someone just did the next thing.

We just had national PBS come by and do some filming (it was Paul Solman, the economics corrrespondent) and were proud to be able to show our place which is both beautiful and functional.  I imagine they came with the idea that we were going to be slightly deranged doomsday preppers and left with a bunch of footage that did not support that projection.

When directly asked if we were doomsday preppers, I simply said, I do not live in isolation waiting for some future event.  I live today, as happily and completely as I can, with a strong bias towards surrounding myself with beauty and healthy practices while engaging deeply with my local community. 

If I get to do things I love each day, save money, eat more healthily, sleep well, and happen to have things in place that make me more resilient in case the future turns out to be less forgiving and abundant than current life provides, then how is this anything other than completely sane and rational?

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 3086
ferralhen

HI, 

Your progress is pretty inspirational for those of us who actually take the preparation ethic seriously. My biggest problem, one which you have apparently solved, is how to create enough compost.  I can always use way more than I have.  Perhaps you could give us a bit of a tutorial on how to create and maintain a "massive"compost pile.

Thanks

Doug

jdye51's picture
jdye51
Status: Silver Member (Offline)
Joined: Feb 17 2011
Posts: 157
Wow

Wow, Ferralhen, just wow.

Ditto on the compost explanation per Doug.

yogiismyhero's picture
yogiismyhero
Status: Silver Member (Offline)
Joined: Jun 28 2013
Posts: 173
You are awesome...

...since you have come to our community I have felt happier when reading you, and I am always happy. Pretty cool gift and breath of fresh air you are.

BOB

Tall's picture
Tall
Status: Platinum Member (Offline)
Joined: Feb 18 2010
Posts: 564
Massive compost

Feralhen may have more details, but may I jump in here and suggest some sources for making compost:

- food scraps from your own as well as commercial or school kitchens or produce departments. This includes pure waste streams like coffee grounds, but also those you may need to sort (those that contain meat or other waste).

- animal wastes and their bedding. Even chickens or rabbits from a smallholding can add valuable material.

- fall leaves, grass clippings, etc.

- garden waste. A hot compost pile will destroy pests and disease, so it is OK to put in garden refuse, such as chopped tomato stems, etc. if you manage your pile to heat up.

- municipal yard waste. Some municipalities may provide composted leaves, yard waste.

- tree care companies many times will deposit chipped wood for free at your location.

-spoiled hay, animal feed from the farm store.

Just beware the persistent herbicides (http://compostingcouncil.org/persistent-herbicide-faq/) as they can damage your property for years. If in doubt, use the bean bioassay before adding unknown material to your garden soil (http://www.manurematters.com/na/en/bioassay.htm)

Nervous Nelly's picture
Nervous Nelly
Status: Silver Member (Offline)
Joined: Nov 23 2011
Posts: 209
My hat off to you Madame!

I'm 54 and I'm ceratinly no wilting flower but I wouldn't even  consider attemping what you have achieved all by yourself. You've got it all together. You've give me inspiration and courage.

You live in an area that's sunny almost year round.  I have considered solar freezer ,fridge etc but up north  my  boyfriend said it's not possible.  He says the best way to produce electriciy on demand would be to buy a piece of land wirth a small river that has a 5 meter grade. Hydro power on a small scale. We're still looking at our options.

NN

gillbilly's picture
gillbilly
Status: Gold Member (Offline)
Joined: Oct 22 2012
Posts: 423
Crashes of various sizes

Chris,

So glad the interview went well! I completely agree with your perspective. The Crash Course to me is about building indivdual and community resillience. I know I still have a way to go in comparison with many here, but I try to take little steps whenever possible. Eventually all those little steps will add up to a larger step. I also think of "crashes" as inevitable in life, and they can be of various sizes... individual, community, national, markets, energy, etc. To lose a job or loved one can be a devastating crash for an individual. To have a hurricane take out your town can be a major blow to your community. Building psychological and practical resillience can only help in weathering whatever storms may come in whatever form they may take. 

Even with just the knowledge of building resillience, it has helped me let go of much of the insanity I see. I have to say this summer has been somewhat tranformative, and I've had a chance to digest much of what I've learned over the past year. I'm much more prepared to meet and experience life as it happens. To me that is the "prepper" I've become.

Many Thanks!

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ferralhen
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thank you one and all

thank you one and all for all your kind words . and yes chris if you are in michigan certainly stop by..(or any others).maybe even for brick oven pizza and toppings from the garden.

i'll have to address things tomorrow as a friend's mother is dying in conn. and i need to give her phone time tonight.(which means no dial up internet...i don't have a cell phone)

tall is on the right track for compost.

since so much leaches down, i compost on the garden on the fallow part.and melons love to grow right in the middle of the pile.(well anything does) i learned this after a few years. it's strickly volume...one year i had 90 yards of wood chips and 100 cubic yards of leaves....breaking down...i mow 7 acres so you know where the grass comes from. i'll get more into ph details etc.

i follow alot of ideas from elliot coleman so you can look up some of that tonight.

compost breaks down ...that is why forest floors remain at the same level...keep that thought in mind.

so i'll check in tomorrow  maybe with a pic or two....i'm an artist so i'd like to think some of this looks nice.

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Amanda Witman
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Spot on, gillbilly.

gillbilly wrote:

I also think of "crashes" as inevitable in life, and they can be of various sizes... individual, community, national, markets, energy, etc. To lose a job or loved one can be a devastating crash for an individual. To have a hurricane take out your town can be a major blow to your community. Building psychological and practical resillience can only help in weathering whatever storms may come in whatever form they may take. 

The resilience-building steps we encourage here are a helpful (many here would say essential) form of self-care and general responsibility that will extend to many potential situations.  Anyone who does these things solely to fend off the potential effects of a large-scale economic crisis has missed that point.  Though, as Chris would say, it ultimately doesn't matter what their reasons are.  Taking any steps to build resilience, for any reason that makes sense to the individual, is what matters.

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ferralhen
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compost

good mornin

soil is an individual case by case situation.

there are many good books on composting so i won't try to look like an expert. in fact i am not an expert at much, but i can share what i am currently doing, and hope i keep learning.

e coleman finally came to the idea to mimic nature. which is a top down concept. so after years of big messes here, i came to the same conclusion.. most of the good stuff goes into the ground underneath the compost pile (so now i have all these rich deep green grass patches! everywhere but my garden)

composing could be a full time job especially without a front end loader(which i don't have one) and you won't either most likely.

i let nature break things down which depending on the starting size of the matter could take up to 5 years. so the 5 year plan...every year add a pile.  in hurry? too bad! being in a hurry is modern status quo and not how nature works. you could do hot piles and turn constantly if in a hurry.   but i would think if in a hurry, you don't have time to turn it.

so i have a fellow who wants to hunt here and he just happens to be a tree trimmer, and he brings the load of wood chips each year. last year i wanted more acid for my soil (since i have a high ph due to marl located about 18 inches below the surface.) he brought me pine needles and bark and wood chips...a most wonderful pile that is breaking down.

like i said i have plenty of grass clippings. i find they are best when green and juicy so i get them on the pile right away. i only take grass  certain time when no dandilions flowers or grass seed.since i cold compost.

i do not use animal manure.

i have found that straw and hay have too many "farmer" chemicals and weed seeds.

because i make my own, i know whats in it.

certain trees like walnut and cherry are not good for the garden.

i would guess a 30 cu yd pile of wood chips breaks down to about 8-10 cu yds of compost in 4-5 years so 5 of those piles take up an area of approx.20' x 100' i have them on the north side of my gardern that is accessable for the big trucks that haul 30 yards of wood chips.. you need a 12 ft wide opening for a truck to pass thru.

when i decide to, i take a lawn mower and mix grass, leaves, woodchip compost and make a fine product for special treats to plants.

over all,just piling it up, letting it set, does the job with out all the labor.shovel out from the bottom.

the municipal compost nearby uses post waste water sludge( i've most do) so that is out...you know heavy metals, etc everything you don't want in your drinking water now in your compost.

i get leaves from people i know who don't use chemicals in their yards.we mulch and grind up in place bag it and bring to my garden. i don't have deciduous trees because when i am 80 i don't want to do leaves. i have over 200 pines planted and i did plant one maple tree to the west of my garden so that future leaves will drop in place.

i dump my food scraps on the piles and birds come to eat and poop on the pile indescriminately.

it takes decades i think to build great soil and maintain it. i use wood  chips, grass clippings, leaves, potash from my wood stove, and rock phosphate. this works for me. i have about 40 lbs of rock phosphate stocked up and probably use about a pound a year.(sparingly)

once your soil is as you want, adding about an inch of compost on top each year is the maintainance dose.

for greenhouse users, unless your greenhouse moves, the soil needs to be rotated out every 3 years.

doug does any of that answer your question? if not ask more specifically.

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RoseHip
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Compost Trommel

Here is a few photos of a soil trommel my good friend built, for those that might want to speed up the compost to soil issue. This model is powered by an extracylce to get the back wheel the length to articulate and turn the trommel and the other persons would throw compost directly into the spinning chamber and the compost gold or fine particulate shunts out the back into a neat pile and the large stuff needing extra time to break down kicks out the sides as seen below. My friend built this model out of scaffolding and motorcycle wheels. The whole things can be assembled or disassembled in about 15 minutes and turns a large pile in about 1-2 hours of shear beautiful soil enjoyment. Rose 

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Christopher H
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This thread is exhibit #1 of why I love this site so much...

... as well as the mindset of pretty much everyone I've come across here.  What started out as a thread on preserving wealth in the modern, financial investment sense (and I include hard metals in that category) has morphed into a thread on composting and frugal living.  I think that speaks volumes to not only the effectiveness of Chris's message for thinking outside of the normal box, but also to the quality of the other people who come into this virtual space.

And Ferralhen -- I just love your style!  You are indeed an inspiration to all of us, with the way that you've overcome some significant obstacles in life but even more by the way that you've just improved your homestead bit-by-bit over time.  It's a much needed reality check for someone as impatient with my progress (or sometimes seemingly lack thereof) year-to-year.

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Doug
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Ferralhen

Thanks so much for your input.  I do have a couple specific questions.

I, too, mow quite a bit of ground, but not nearly as much as I used to.  How do you collect your clippings?  Do you have one of those collector contraptions on the back of your mower?  I rake up enough to lasagna compost a bed about 4'x8' at a time, but that is a very labor intensive way of getting clippings for a large pile.

Do you sheet compost in your garden?  That seems the least labor intensive method as you don't have to move the material more than once.  I have lots of woods, almost all deciduous, and can accumulate piles of leaves.  I find it is better to shred or mulch the leaves, otherwise they tend to layer and become anoxic.  Again, however, I need to rake as I don't have any other collection method.

I have compost bins where I dump kitchen scraps and mix with other materials, but in terms of quantity, they aren't great contributors.  I also use chicken straw from our coop, which turns out to be terrific.  We're getting more chickens next spring, so should be able to produce more that way.

Any more thoughts you have, I'm all ears.

Thanks,

Doug

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ferralhen
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doug i use one of those

doug

i use one of those contraption/leaf picker uppers that finicky pulls behind the mower...i usually set aside a whole day to collect grass. i cut 300' turn around and collect. that usually fills the hopper in one or two passes.  i also use a toro 22" reycler mower with a bag, for some alfalfa i have growing. the mower pulls me along. sometimes i cut the grass with the mower instead of taking a 3 mile walk. it's all mindless but leaves my mind free to dream solar stuff. or realize i'm not on the freeway with the idiots...  my neighbor mulches up her leaves with a riding mower and then i use this mower on the leaves which bags up quickly and i dump in a wagon and tractor over to the pile.

i'm been known to rake up the grass...my bro asked me why i was so stupid.   i replied he paid to go to a gym and i got the exercise for free and clippings to boot.it's alot to how we look at things.

i weave in alot of attitude in  when i write because i think the shifts we make are going to need alot of positive thinking. most of us have been taught for too long that working hard is stupid.

i noticed when i accepted the work to the point where i enjoyed doing the work, it went by faster and i was happier.physically too...nothing like raking for upper body exercise.

i sheet compost sometimes, and make piles sometimes with the leaves and grass. i find mixing the leaves and green grass together breaks down the fastest. ix with a mower or finer with a chipper shredder.

once i let go of keeping a beautiful garden and became more functional, i got way better results.

i work slower each year and get less done and i'm accepting that too. i work at a comfortable pace so i don't hate what i am doing.

my lawn tractor blades are usually shot by the end of the year and i use that to tearup and mulch the garden to set for the winter, then i pile all kinds of mulched up stuff for the winter. since i have black sandy soil, i'm very aware of wind erosion so i try to keep something on top all the time.

i have a chipper shredder to sell if anyone looking for one.! i just don't use it.it's great if you want to make small pieces so that it breaks down fast, but i can hardly pull start it now....since you are pulling the flywheels when you yank. it would take a man or young athletic woman to start it.

i always feel weathy when i compost. it's a yeild of sorts.

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yogiismyhero
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Yeah Ferralen, I muscled up in the yard too...

...when I had my 6 acres little farm. I cut in sections because I had other committments. I cut one day, let dry and raked it up the next. Less moisture more compost.

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Doug
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Thanks ferralhen

If we lived closer, I might buy your chipper shredder.  I've been thinking about doing exactly that.

I have a mulching kit on my mower deck and it does a great job, but picking it up afterward is difficult.  I'm considerably older than you, so labor is a consideration.  I'm trying to get to the point that less work is required every year, but I'm not there yet.

Gotta go move the chickens.  Thanks again.

Doug

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cmartenson
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Gathering Grass Clippings

In our house, the grass clippings are a valuable, harvested commodity.

We have a 22" walk-behind mower that has a grass bag on the back.  Our system has evolved from one where we used to take the bag off and empty it every time it became full, which required stopping and re-starting the mower, to one where we simply tip the bag upwards when it's full and dump the contents as a pile on the lawn with the mower still running.

Then, afterwards, we go around and gather up the piles in our garden cart.  

This is waaaay more efficient than the old method because you don't have to stop/start the mower.  

We then use the clippings directly on the garden as mulch.  In early June there are not enough clippings, by mid-July they are sufficient, and by August they are too numerous and we then dry them on the driveway and save them for September when we do our final harvests from the garden and create lots of empty bed spaces that need to be covered up.

If we had enough lawn, I would then have clippings enough to also use in our compost pile but, alas, we only have about 1.5 acres of lawn to mow, and that barely does the job for our 55' x 100' garden.

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ferralhen
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chris i was wondering of

chris
i was wondering of that so good confirmation of the mower/dump technique it uses so much gas to start and stop.... sometimes at my age, i like to stop the mower tho, and reflect...ha ha.
everytime i run the mower or rototiller i am thankful for one gallon of gasoline...
our generation and forward are reinventing the wheel or should i say relearning the wheel.

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ferralhen
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addenum to clippings

the "green" from the extra grass drying is wasted sunlighti dried on the driveway. dry over some dirt so it sifts down so to speak and is captured. better yet dry over compost pile or o the grass itself..natural fertilizer

ferralhen's picture
ferralhen
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nn--solar power

re solar freezer. it's not that sunny here. one can always just have more panels to produce the desired amount of electricity . amorphous solar panels work better in cloudy situations than the poly crystalline ones. lightning even gets picked up by the panels...as i've discovered at night. after a flash of lightning, the charge controller goes on for a few seconds. people have been electrocuted working on solar panel arrays at night when lightning occurred.

don't let "engineer talk" disway you. less sun just means you have to buy more panels than someone in a sunny area. it's sheer math -figure out what you need and get it. there are tables on the internet for this.

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Doug
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Thanks

ferralhen, Chris and Tall.  You've all given me food for thought.  My immediate goal is to find some 'contraption' to collect grass and leaf mulch.

Doug

gillbilly's picture
gillbilly
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Reducing waste even more.

Since we're on the subject of composting. Our trash stickers just went up another dollar (from $1 - 4 in the past 10 years) so I'm looking to conserve even more. We've been composting for awhile, but we haven't taken the plunge with our two cat's litter, and it's painful to throw it in the garbage (physically and psychologically). Can any of you recommend good biodegradable litter? I've done some research, but would appreciate any advice from those who have tried them and composted the litter. I'm well aware it has to be composted separately, but any other advice would be appreciated. You can PM me if you like.

Thank you

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Phaedrus the younger
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takes time and patience...

Mark, I hear you.  Took us 5 years to find a decent piece of land at an affordable price.   5 summers of weekend trips all over looking at prospects and rejecting them all (about 60 plots visited in person). It was worth the effor though!

We're still getting used to strawbale but it's been fantastic so far.  We're from the great white north so reasonably chilly winters.   We heated our entire 1400 sq ft bungalow with a small wood pellet stove running maybe 8 hours per day.  The propane furnace turned on maybe a dozen times in the wee hours of the morning. 

Good luck in finding that plot!!

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Anne A
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Not a fan of New Harbor or Chris's referral to them

Through Peak Prosperity's referral, I was a client of New Harbor for almost 2 years. They are sincere and hardworking people, and yet in the end their fees of 2% (PLUS trading fees) were untenable. That is on the high end anyway. My previous advisor charged 1.25% (and those fees make a big difference in the long run), but I wanted someone who understood the Peak Prosperity philosophy. Over time it made even less sense to me to be paying 2%, with the markets in such disarray and since I had a good percentage in precious metals and cash. Above they say: "Clients do not sit with a money manager that is holding cash." Yep. The final blow was when I emailed frustration that it seemd they were the only ones making money (after all if you net, for example, 2% on your investments (after their fee of 2%, you've paid 50% of your growth to New Harbor) my advisor never responded. I know he didn't know what to say, but not answering was unacceptable to me. He only addressed it when I brought it up. And then he admitted they can't give as much attention to small accounts like mine which are in mutual funds and that it's very tough for financial advisors right now. I appreciate his honesty, and yet I felt stupid for even signing on with them - all their "great ways" of investing didn't seem to apply to me in the end because I was too small (though I did qualify as they had a mimumum portfolio level). Also, they left it up to the client to contact them when they had questions or concerns which I think is a very bad stratgey, because cleints will mostly call you when they are having a problem! Yes, it takes a lot of time to do periodic reviews, but in my book, that's the way to go for high end services. Now I am paying a financial advisor I had worked some years back on a per hour basis to evaluate a few times a year (plus all my own research and anaylsis). I try to take 100% responsibility for my decisions in this and all cases, but I am greatly disappointed in New Harbor, and in Chris for this referral. Note: I have no problem whatsoever with Chris & co. making money off of referrals to various products and services; he has to make a living and his is very transparent about all of it. 

 
jdye51's picture
jdye51
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Posts: 157
Anne, My husband and I

Anne,

My husband and I switched to New Harbor also because of their familiarity with Chris and the 3 E's. We have certainly been happy with their approach and with their service so far. They are a big improvement from our former advisor who did business -as -usual as part of a large company. I never felt comfortable with him and didn't feel we were being advised well.

You bring up a good point about fees and each person using any advisor needs to evaluate for themselves if it makes sense to use their services. So far, we are sticking with New Harbor but will continue to review our situation over time. I must say it has been refreshing to work with someone who understands the larger situation and our need to be defensive in our investments. Our advisor has been honest about the contrast between a soaring market versus their agreement with Chris's emphasis on cash and PMs and the dilemma this presents for some. He has been very responsive and helpful.

All the best to you while we all await the crash to come.

Joyce

nedwina's picture
nedwina
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Posts: 2
contraption

I have one of these: http://www.cyclonerake.com/ .  It used to be my mother's, who used it into her early 80s.  She didn't want to be reliant on her kids or landscapers to deal with her leaves.  Works well, easy to dump, but you do need ample space for storing it.  And a lawn tractor.  Made in USA too, which is nice.

blackeagle's picture
blackeagle
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Posts: 184
We are getting there too

My wife and I just finished building our house. It took us 4 years of hard work. The house is luxurious, high-end materials, large (3200sq/ft), garage, workshop, well insulated, on 27 acres of land. We are happy: We realized our long time dream, but... it is not the house we need in the perspective of future living standard progressive degradation. it is a house for consumption, for two cars, for permanent spending, etc...

Fortunately, we will sell it (I have to get closer to my work which is 90km away). We have already bought a smaller lot (5 acres, with a creek and the possibility to grow veggies and other crops).

The new house will be smaller (We are just 2) around 1500sq/ft max. Have solar energy production facility (We could also connect to the grid to "sell" our surplus production - not really selling, but offseting our consumption, which is fine). insulation will be above average for both winter (in Canada) and summer. The house will have a Canadian well.

We will also change our ways of living: veggie production, local purchase, use season food, grow chicken, etc...

All what you share is highly appreciated and an inspiration for our plans.

Thanks for all of you.

By the way, we are 49 years old. This not old at all to start again (The right way this time).

Regards

JM

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