The Paradox of Thrift

by JDH on December 27, 2008

Before I briefly comment on the paradox of thrift, I must announce that this is my last weekly commentary for 2008, and it marks two consecutive years of writing these weekly commentaries since the first one was published on December 30, 2006. That’s exactly 105 consecutive weeks of sharing my thoughts, and that leads to one inescapable conclusion: I need to get a life.

Actually, I have a life. And a wife. And two sons. My sons, for the record, were quite happy with the snowfall we have received here in south western Ontario in the the pre-Christmas period, and they spent Christmas Eve Day building snow forts. My wife is less enamored with the snow, since she gets to drive the tractor with the front end loader, moving the snow around. I clean up the walkways and steps with the snow blower or shovel. So that’s my life: writing commentaries, and watching the family have fun in the snow. (I also own and run a company with 50 employees, but it’s a company that has nothing to do with investing, mining, gold or anything I talk about here, so it’s not really relevant to the story).

What is relevant is that, over the past two years, I have seldom been correct. My portfolio was up huge in 2006, almost doubling, but then I gave back those gains in 2007 and 2008. Which of course begs the question: why do you continue to show up and read this stuff? (And my web stats show many hundreds of thousands of visits, so many of you are reading, and a number of you contribute regularly on the Forum , for which I thank you).

In my own defense, virtually no-one was correct about 2008. I don’t recall anyone at the start of the year advising the selling of all stocks and commodities, and going entirely to cash under the mattress, which in hindsight was the correct strategy for 2008. I do recall many experts predicting tough times in 2008, and they were right. Unfortunately, their advice didn’t translate into great profits for any of us.

Many advisers said to buy gold stocks, and in fact, up to the end of October, stocks like K.TO – Kinross Gold Corp. were down around 30% on the year. Amazingly, however, between Halloween and Christmas, Kinross is up around 22%, so the end of the year has been good for gold stocks. When you do the math, Kinross is now up 12% on the year, which given the devastation on the markets, is a good year.

Senior gold stocks compare favorably to other measures, like the Dow and S&P 500 indices, both down over 35% on the year.

I continue to believe in gold, even though my portfolio has suffered in 2008. I don’t worry about a down month, or even a down year. No-one can catch exact tops and bottoms. I prefer to look back over a multi-year period to judge true success, and I believe that when we look back to today from the end of 2009, and 2010, and 2011, we will see that now was a great gold buying opportunity.

So what specifically do I see for 2009? Will 2009 be the first year since 2006 when I will finally get it right? I’m not going to answer that question today; that will be for next week’s first ever annual forecast issue, where I will throw some darts at a dart board to predict the future.

While I work on my predictions, I want you to work on yours. Please go to the Buy High Sell Higher 2009 Predictions page to download a blank predictions document in either Word or html format. Save it on your computer, edit it, and then e-mail it back to me at the Buy High Sell Higher 2009 Predictions Mailbox. This e-mail address will remain active until December 31, then I’ll delete it. On January 3 I will post your predictions on the Buy High Sell Higher 2009 Predictions page.

Everyone who submits a coherent prediction gets their own page in the Predictions section. The predictions will remain there forever (or until I take them down). I think it will be instructive to look back over time and see how accurate we are.

Depending on how many of you respond, I may try to summarize the results to determine the consensus of the group. Many of you have already responded, for which I thank you.

While I won’t lay out my entire thought process today, I do very strongly believe that 2009 will be a much more thrifty year than we have seen in the last two decades, as eloquently described by Gary Shilling in this video:

I agree with Mr. Shilling. I believe as individuals many of us now realize that our jobs may be jeopardy, and therefore 2009 will be a year where we try to pay down debt and save money. That’s a great strategy for us as individuals, but that thrift will be bad for the economy in the short term. The economy has grown over the last two decades due in no small part to the expansion of credit. We borrow to buy, and that creates jobs. Unfortunately we are now “borrowed out”; no-one will lend us any more money, either as individuals or as a country. Without borrowing supported purchasing, the economy will have no choice but to continue to contract in 2009.

And that, of course, is the paradox of thrift. Thrift is good for us as individuals, but perhaps not great for the economy as a whole.

Could I be wrong? Could massive government spending replace the reduction in consumer spending?

Perhaps, but that’s something we can ponder as we write up our 2009 forecasts, so go to the Buy High Sell Higher 2009 Predictions page to submit your predictions for 2009.

Thanks for reading over these last two years; next week I’ll lay out why I think 2009 will be a great investing year, provided you have your money in the right areas.

See you next week.

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