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Assume the Brace Position

May 31, 2017

My friend and British investor extraordinaire Jim Mellon, who made a large amount of money traveling the world doing real estate, is now focused on thinking about and investing in life extension and its derivatives. But he's also worried about what happens when a lot of people live longer and how we pay for it. He shares my concern about the demographic bubble that we are already in becoming even worse as we live longer than we expected. Further, he points out the same thing I have about the massive move into passive investing and how it is dangerously turning into a bubble in its own right.

In place of passive investing, which he calls “a sort of pass the parcel game for investment morons,” Jim suggests we focus our attention and money on “Juvenescence”-style investments – that being the title of his about-to-be-released book on investing in the age of longevity. Why not, he says, “benefit from the very things that will keep you alive to an age that would have been regarded as science fiction just one short generation ago”?

In conversations with Jim, he has broadened that focus to other investments that will either benefit from the coming transformational-technology revolution or have enduring value, like real estate.

He couches his advice, however, in some sensible caveats with regard to being in today’s markets at all. Markets are quiet at the moment, says my worldly-wise friend, “but the mayhem is just around the corner. Assume the brace position.”

I will admit to not having much energy after powering through five days of 16- to 18-hour days at last week’s Strategic Investment Conference. It was, from all the post-conference conversations I’ve had and emails I’ve received, the best SIC conference I have ever done. You really should avail yourself of the opportunity to get the audiotapes and transcripts of all the sessions. I know some people prefer audio, but I prefer transcripts, so we give you both. Plus hundreds and hundreds of slides. You can find out how to get your own set at SIC Virtual Pass. And, I will shortly be turning my attention to our 15th conference, next March 6-9 in San Diego.

I am just about back to my normal schedule. I’m still busy, but I do get to sleep at night now! And I will be home for the next three weeks, so my full intention to catch up on my overloaded email inbox.

I will close this letter quicker than usual and simply wish you a great week!

Your trying to surf the wave of information constantly pouring in analyst,

John Mauldin, Editor
Outside the Box

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Assume the Brace Position

By Jim Mellon
Originally published May 30 by Master Investor

In the past month, I’ve been going around the British Isles, talking to groups of people about my research into longevity, ahead of the launch of the Juvenescence book in July. I know it’s always a mistake to develop confirmation bias, but the more I talk on the subject, and the more I look into the fast-developing science, the more convinced I become. By convinced, I mean that I am quite sure that average life expectancy is going to go up sharply – and in the near future.

It may not feel like it today – what with life expectancy having stalled in the UK and in the US – but that is a temporary phenomenon, due to poor lifestyle choices. In the US, the death rate from prescription opioid drugs is phenomenal, marginally deflating average age at death.

But the fact is – and it will all be detailed in the book – that we are all going to live a lot longer (assuming we do some simple things and embrace some new technologies).

To pay for these extended lives, we are all going to be working much longer – and only now is that  fact beginning to dawn on commentators. Moreover, we are going to have to save – and in a much smarter and aggressive way than we do now.

That means eschewing these tracker funds that have become the norm for so many investors – a sort of pass the parcel game for investment morons.

We all need – indeed, have to – select funds or shares that are going to reflect the future world – and not just slavishly mimic the current state of the markets. The US firm Vanguard is opening in the UK – and it is the key exponent and beneficiary of tracker (index) funds globally. It takes in so much money on a daily basis that its activities actually have an important market moving effect.

Vanguard and similar types of funds’ main attraction is that they are super cheap in terms of fees and total costs, and they have benefited from the fact that indices have generally done better than active managers in the past decade or so, meaning that people are turning away from active management. Warren Buffet endorses them as his preferred way to invest (if he was an ordinary Joe Sixpack that is!), and who can doubt the great man? Well, I do, because I think copycat investment over the long term is a serious error.

The fact that you are reading this means that you are interested in investment, so why not translate that interest into actions that don’t just reflect what everybody else is doing? And for heaven’s sake, don’t waste your time in low-grade chat rooms or by listening to market commentators who work out of seedy garrets and who have no or little money. If they haven’t made anything in the course of their “careers”, why would you follow anything that they say?

Stock picking has become a dying art, not helped by the fact that so-called active managers charge a lot more for their services than tracker managers do. But stock pick (or fund pick) we must, because one day the whole tracker industry is going to come down like a house of cards. That day of reckoning may not be so far off.

When everyone heads for the exits in these index funds, the decline in the indices will be amplified by the redemptions from panicked investors, and the whole thing will snowball out of control. Believe me, this will happen. It’s only a question of when.

Who knows when this will happen? But the omens are telling me that it can’t be too far away. After all, the key measure of volatility, the VIX, is at all time low levels, indicating that investors are far too complacent about market risk. PE ratios are high, particularly in the US, and especially for boring, slow growing so-called consumer staple stocks. And don’t get me started on the FANG tech stocks, which are absolutely priced to a perfection that doesn’t and won’t exist.

Amazon is a great business, but its valuation beggars belief; Facebook and Alphabet can carry on growing, but I am certain they will end up being regulated, crimping profits; and Apple and its shiny repertoire of gewgaws, can surely only pedal away for a while longer. Toys get discarded, and new ones come along.

So, what should investors do? Well, I think we should all be looking at Juvenescence type investments, and the new book will detail three portfolios – conservative, medium risk and speculative – for people interested in the business of longevity. When we published Cracking the Code in 2012, Al and I suggested three portfolios, and all of them have at least doubled the performance of the broad indices, and provided great returns for investors.

Second, committed investors should make a list of companies that they really like, know about, and want to own – at the right price. If the shares of those firms are too high, put in limits, possibly 20-30% below current levels, and wait. Don’t let cash burn a hole in your pocket – let the stocks come to you, and don’t chase.

This is absolutely not the time to be rushing into stock markets; yes, maybe there is a little more upside, but the downside risk way outweighs that potential and fleeting upside.

Third, think strategically. What goes up in periods of market turmoil? Of course, it’s gold and/or silver. What is the outlook for the US dollar and for sterling? Well, sterling looks undervalued and could rise another 5-10% against the dollar. The Euro, doomed at some date in the future, remains a speculative buy (see my last two letters) against the dollar, but not against the pound.

So, in a nutshell, cash is a good thing for now. Limits at way lower levels on the great companies you want to own a share of are good to establish – and do it now. Gold is a good thing, and sterling is a good thing. Sterling might actually become a safe haven in a world of turmoil.

But best of all, look at Juvenescence type stocks. Live long and prosper – i.e. benefit from the very things that will keep you alive to an age that would have been regarded as science fiction just one short generation ago.

I’m sitting on my terrace at my house in Ibiza; this house was the first purchase I ever made and next year will be the thirtieth anniversary of that transaction. It’s a quiet Sunday morning, with birdsong the only sound for a long way around.

But I’ve been here for long enough to know that next month the peace and quiet ends and the mayhem that is Ibiza in the summer will begin.

And that makes it a bit like the markets – quiet at the moment, but the mayhem is just around the corner.

Assume the brace position.

Happy hunting!

Jim Mellon

Discuss This


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Andre Furtado

May 31, 2017, 10:23 p.m.

Jim Mellon has talked about the stock market. The argument is sound. As a retiree I am told to put at least 65% in bonds and in short term bonds/treasuries if interest rates are rising. Goldman comments below that all debt is bad. Does that mean we ought to get out of bonds too and be mostly in cash?

Mauldin solutions , if I am right, plans to move more into bonds when the stock market is dropping. I am therefore confused.

jack goldman

May 31, 2017, 7:46 p.m.

We have had fifty years of inflation from 1966 to 2016, also known as currency counterfeiting. The Fed went from $10 Billion a year until 1986, to $600 Billion a year since 1986. Billionaires are “minted” by the Fed inflating assets. We are in a massive global debt bubble, caused by currency counterfeiting and asset inflation. This is why people don’t pick stocks. Everything goes up. Buy the index and avoid wasting time doing research. How long will the Fed keep inflating the economy? As long as it can. Stop inflating, stop the debt, stop the loans, and the whole thing comes crashing down about 90%. No one has cash. It’s all debt. The Fed now runs the global economy with counterfeiting. I have to protect myself and my estate with inflation hedges. They say, “Don’t fight the fed”. At some point the thing has to reset. John Mauldin has talked about this great reset. It’s unavoidable. The collapse will be swift and spectacular. The system will be locked down while sorted out. There will be bargains. These are interesting times. Protect yourself.