February 2010

I was reflecting on events this past weekend trying to put a game plan together and weighing what is going on in the world. I can honestly admit that I do not know what will happen, no one ever really knows, but I do know that things are very uncertain in our world. We are all in the same boat and trying to make decisions that are best for our families, our wallets and our piece of mind. Unfortunately many of the things we are planning for are outside of our control.

It is reasonable safe to assume that our futures never depended more on the decisions that are coming out of Washington, well, at least not since the 1930’s at least. However, Washington is now only one piece of the pie as our world is walking in stride as one. While decisions in Washington directly impact our lives, for the love of God pay attention to what they are doing, now we are also faced with the consequences of decisions that come from China and the EU. Decisions made overseas will have a direct impact on what happens here in the USA and on our investments. Never before have the world markets have been so in tune with each other. In fact, you would be surprised to see that the correlations between all the markets follow each other so closely over the past 6 years or so.

This correlation has really put the efficient frontier and diversification risk reduction strategy into question. In other words, diversification between international and domestic equities might not reduce risk as much as we think, I will get charts to prove that when I get the go ahead to publish them. The irony is that it is not so much markets ruling the day, but politics. The decisions that come from governments now impact the markets much more than you might care to realize. This is important considering that government stimulus from around the world is largely responsible for propping up global growth at this point in time.

Domestically, I was watching parts of CPAC this weekend and was extremely disappointed in what I saw. Granted, I did not watch the whole thing, but enough to know that the R’s, as in Republicans, have no idea what they are doing. Unfortunately, either do the D’s, as in Democrats, know what they are doing either. Both parties fail to take responsibility for their actions and neither party really understands the issues facing the country at this point in time. Sure, they talk a good game about fiscal responsibility, but neither is serious and, frankly, the R’s have grown government way more than the D’s have over the past 30 years. In fact, Ronald Reagan had grown the deficit by a whopping 189% yet we credit him with being a fiscal conservative, huh?

While many of you may think I am a right winger I am not, I am a political atheist. It is not that I do not take a stand on any issues or beliefs I have just come to the conclusion that the party I would belong to simply does not exist at this time. If I were to align myself with any party it would be the Libertarian Party on the strong money principle, but I also recognize that the free markets will never be able to regulate themselves. The proof of this was 2003-2007 as the free market rolled on and some Einstein somewhere thought it would be a good idea to push no document loans to anyone who would be foolish enough to take one. You cannot honestly tell me that these incredibly smart people did not know these things were bad loans at the time. They knew and they also knew that they only needed a couple multimillion dollar bonuses to be happy.

My point is that we have no real political leadership and they simply are pushing what they believe is the right policies. However, they do not know what they do and they do not understand that the problems facing America are those silly policies to begin with. To them, though, it is all about reelection and keeping their power, if that is not a true statement then we would have had term limits on Congress instituted decades ago, but we don’t. It comes down to the real fundamental problem in America is that we do not have the will to make those tough decisions. I really believe that the products we buy demonstrate our beliefs and we have way to many “I” products being bought which means we all only care about ourselves.

All of this adds to the uncertainty that I feel and the feeling I have in my gut is growing by the day. There are so many problems out there that are not being addressed and when we do address them we simply throw billions of dollars at it which merely wallpapers over the roots of the problems we face. The very problem that we have is that we are waiting for Washington to solve our problems. How can we expect self serving Congressman or Senators to solve the problems we face? Half of them are multimillionaires and the other half are probably on the take somewhere along the way. Yet we trust them to solve our problems or understand the average person, good luck with that.

I watched this weekend as former politicians lambasted Obama while they ignored their roles in the problems we have. I watched them blatantly distort the facts about where we are and how we got here, sorry folks, but it took a whole lot longer than 1 year to get to where we are. I watched them roll out with no new ideas or inspirational speeches and I distinctly got the feeling that they simply think that because they have an R in front of their name they will get elected because they are different from the President’s party. Maybe they will, but I think it will be much harder than they think because 10% unemployment, 18% by U-6 or much higher if we re-add the people the BLS removed from the labor force, is a real problem that both parties have to take responsibility for.

On top of the domestic political uncertainty we have global uncertainty. We have Europe in or on the brink of a major crisis with the PIGS. We have China who is really upset over us, do you blame them (?), over selling weapons to Taiwan and the Dali Lama, not to mention the mini trade war we have brewing. China is also taking their stimulus off the table, or so it appears, along with India. Those economies play a huge role in the global growth story and if they are tightening their belts this is a problem for that story.

Finally we have Iran, of how I love the nut jobs in Iran, whose leaders are actively seeking to become a nuclear country. While they technically are a nuclear country they want to take this to a much higher level with missiles and warheads. Call me crazy, but I have a real problem with a country that has loose cannons running it and they have reached a level where they have nuclear fuel along with a missile that can reach orbit. Sorry folks, but the story about the mouse they launched into space was not about a mouse and it shows their intentions which should make us all very nervous. Thank God I do not have to make policy decisions about what to do about them. I just hope Obama and company make the right decisions in regards to handling them.

All of this uncertainty is not being felt by me alone, but by millions of people. There seems to be no end to it and as each day passes more uncertainty gets added to the fire. The odd thing about this is that the markets just do not care. I guess when computers trade some 60% of the volume on the exchanges, according to CNBC, the uncertainty does not matter. Regardless, it is clear that no matter who is in charge or making the decisions their options are becoming very limited and the outcomes are all looking the same. The best case scenario I foresee is massive inflation and dollar devaluation, over a few years time, and the best case scenario is massive inflation and dollar devaluation.

As I stated earlier, the only thing we can do is pay attention to what is going on and make the best decisions we can for ourselves and our families. I have several friends, smart people I might add with CFA’s and MBA’s, who are leaving the country or adhering to the guns, gold and God philosophy. I have honestly never seen such smart people head for the hills like this before. I am not in that camp, although I do love gold and precious metals, but they might just be right. However, it is possible, I guess, that all of this uncertainty will pass by and everything will be fine, but mathematically speaking, well, I give that a very low probability.

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