Investing Successfully in an Era of Crisis

Brian Hicks

Updated November 11, 2011

We’ve entered the Perma-Crisis Era, which will be more profitable than most investors can imagine right now.

Sure, everything looks terrible: Europe, China, the United States — everywhere you, look there’s a crisis… or one coming soon.

The IMF even warned this week the world economy is on the verge of a “lost decade” (though it feels as if we’re already four years into it).

Worst of all, the consistent year-in-year-out double-digit returns of the 1980-2008 debt-bubble era are a thing of the past.

Simply put, it’s not an easy time to be an investor.

But there’s something most investors will never understand about this new era…

It’s perfect for making bigger and faster profits than were possible in the debt-bubble era.

“New Normal” is the Old Normal

If you’re like me, you’re worried every time a new “era” or “paradigm shift” or anything else is declared.

This time is not different. It never is. But it’s sure going to feel much different.

The facts bear out a completely different picture emerging in the global economy than most any forecaster has caught onto yet. By the time they do, it will be far too late.

History shows the post-debt-bubble era will have one major change: shorter economic cycles.

This may not sound like much of a change, but it is — and it can lead to exponentially higher profits for investors.

Just look at the chart below Deutsche Bank’s Long-Term Asset Return Study: From the Golden Age to the Grey Age, which tracks the periods of economic expansion from 1854 up to today:

 Periods of Economic Growth

As you can see, there has been a major change in the last few decades. The periods of economic growth lasted far longer than they did in the previous 150 years.

In the past 30 years, periods of economic expansion lasted about eight years on average. The 120 years before that, they averaged about three years in length.

Now that the debt-bubble-era is over, a return to the long-run average is highly likely.

The “new normal” of two or three years of growth, small recession, and a quick growth spurt are not new at all — they’re the old normal; everyone just got too used to steady growth during the debt-bubble era.

More importantly, these shorter cycles will feel far worse than they actually are, and as a result, they will drive most investors to fear a downturn is near because it is (on average) less than three years away.

Forget your feelings, though. They will cost you a lot of money in the long run.

The facts are what will lead you to excessive returns, year in and year out.

The Golden Era is Over… Now What?

Now, I realize the collapsing global debt bubble has had a tremendous impact over past few years. There’s been no escaping it. And it’s surely not over…

The process of clearing away the excessive debts through a mix of inflation and default will take a long time. It won’t be fun, either.

But now is not the time to do what an increasingly large number of investors are doing: walking away from investing altogether. As we looked at last week, nearly half of all investors have either given up completely or quit putting more money to work.

History tells us this is precisely the wrong move to make.

The chart below from the Deutsche Bank report shows what you should expect in the years ahead:

 Golden Age Expansion

The chart shows the 1980-2008 credit boom is clearly over, yet there are still a lot of gains to be had.

Sure, consistent double-digit returns by buying and holding just about anything are history…

But throwing in the towel will prove to be a costly move.

Even in the pre-debt-bubble era of the last three decades, investors could have earned real (after inflation) returns far above what savings accounts, CDs, and investment-grade bonds are paying right now.

In many cases, returns on these “safe” investments are actually negative.

In other words, they’re losing money. Official inflation of 3% a year is eroding the value of savings earning 1% or less a year.

More accurate measures of the actual inflation levels — which peg the current rate between 5% and 10% — show the value of savings and conservative investments are declining even more rapidly.

Meanwhile, even in the slower-growth pre-debt-bubble era, real returns consistently beat inflation over the long run.

That’s why now is not the time to give up and accept after-inflation losses of 2% or 3% per year. Now is the time to get more proactive.

You Too Can Make 574% in the Perma-Crisis Era

We all know how tempting it can be to just give up right now…

We’re stuck in the middle. Stocks aren’t particularly cheap. Bonds pay next to nothing. Dividend yields on many stocks sit near historic lows. And the global economic picture continues to look bleak.

But all is not lost.

There are massive opportunities out there. But if you can’t look beyond the crisis de jour, you’ll never see them.

And in the Perma-Crisis Era — where economic gains are made in short steps instead of by leaps and bounds — the failure to see the big opportunities will prove costly in the short and long runs.

Good investing,

 Andrew Mickey Signature

Andrew Mickey
Editor, Wealth Daily

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