Investing Playbook: Denver Just Showed the Best Offense Is a Good Defense

Harry_headshot-150x150The best offense is a good defense. I don’t know who first said that, but the Denver Broncos just demonstrated it as well as anyone in last night’s Super Bowl.

Facing off against the Carolina Panthers, the Broncos’ defense completely shut down the offense led by quarterback Cam Newton. I wasn’t even sure I was watching the same player. He had a completely different performance in the playoffs against Arizona two weeks ago. I’ve never seen one team play two more different games!

In the playoffs game, “Super Cam” had plenty of opportunity to show off his incredible throwing and running talents. He completed 19 out of 26 passes for two touchdowns and scored another two himself. Did you see him jump over two defenders to get into that end zone? How many quarterbacks can do that!? That was probably the best performance of any quarterback I’ve seen in a long time.

And then last night, Cam just couldn’t get a break (I call it the “Cam Shaft”). The Broncos completely shut this all-star player down. The same thing happened with the New England Patriots when the Broncos shut down Brady. He wasn’t able to get off many good passes and neither could Cam.

Congratulation to Peyton Manning for winning his second Super Bowl just as he looks to be retiring… but I hope he bought his defensive line a round of Cristal champagne, because that’s who really took it home!

You’re probably wondering: “Am I reading the right newsletter?” You are. My point, of course, is that offense is never enough. You need both offense and defense in any game or business, and the same applies to investing.

And it’s paramount today as we’re facing off against the most formidable opponent in our lifetimes: the economic winter season.

For those not familiar with my 80-Year Macroeconomic Cycle, the economy follows four seasons much like we see in the weather every year.

Think of it in terms of inflation, which is like temperature in the economy. Mild inflation comes in the spring and fall and that’s when the economy does best. High inflation comes in the summer (think the inflation crisis during the 1970s). And today’s deflationary period is like the declining and freezing temperatures of winter, which brings its own crisis that is much, much more severe.

People keep asking me what they can do with such a bearish forecast. Certainly their high-dividend, less-cyclical multinational stocks will be okay, right?

My response: I wouldn’t count on it! And that’s coming from a guy who used to be one of the most bullish forecasters in history. Back in the late 1980s when I had my breakthrough in demographic cycles, I was positive on the economy because I knew we were facing a long-term boom. But today, I’m one of the most bearish forecasters because I see what’s coming down the pipe!

Many years ago, I went back through the last winter season focusing primarily on the 1930s – the worst crash and depression in U.S. history. I was thinking there must have been some stock sector that did well. Utilities, phone companies, booze, cigarettes, gambling, consumers staples, something! But no – all of those sectors fell. Some fell worse than others, namely automobiles, but not a single one escaped the carnrnage that ensued.

And even for the most stable companies, it wasn’t because their sales and earnrnings fell. Rather, it was the fall in their price-to-earnrnings (P/E) ratio. When fear sets in, investors price in the worst scenario for everything. Even when adjusted for dividends, stocks suffered a 20% loss for the decade. At their worst in July of 1932, they were down 89%!

Real estate bubbled less and so therefore fell less, but still had a slightly negative returnrn for the decade. And commodities… forget about it!

But this is where a good defense would have helped. The one sector that did well (with minor volatility to boot) were the highest-quality, long-term bonds… which is about as defensive as it gets!

Look at the chart:

High Quality Bonds in the Great Depression

Long-term Treasurys nearly doubled counting their yields, and AAA corporates more than doubled in the worst decade for stocks and the economy ever.

How’s that for a strong defense?

So my advice to you is this: be like Denver. This is not the time to rely solely on offense. Now’s the time to bring out your best defense and conquer the crash ahead.

I’m still looking out for a spike in Treasury bond yields this year when Sovereign bonds in Europe and other countries face the reality of default. Italy in particular now looks like the next Greece or Cyprus. They’re “too big to fail,” and you know what that means.


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