It ain’t over until it’s over (till the fat lady sings)
Monday, April 5th, 2010
We’re still in bullish mode, climbing a wall of worry at snail speed. Unless there is a surprise event derailing the slow climb, up it could go on for a few more months. The fat lady in this performance is the Fed and the curtain won’t fall until she sings the interest rate blues. Presently there seems to be little likelihood of that happening soon.
Inflation seeds have definitely been sown, but the seedlings have not yet germinated. It could be a year or two till they become clearly visible. That means we can still be invested in equities, but with some precautions. Cash levels should be kept elevated, at least at 25% we’d think. Another 10% or so would be kept in precious metals, mainly gold. The rest can stay in stocks, but make sure you hold quality stocks. Dividend payments are an important consideration. There are quite a few blue chips out there, paying more than 10-year treasuries. We want to be paid for waiting.
Bonds are not our cup of tea, because medium term we expect higher interest rates and more defaults. Countries like Greece are basically bankrupt, carrying official current debts in excess of 100% of GDP and other obligations (pensions, social security etc. ) of 800% of GDP. That can never be paid back, and since neither devaluation nor monetization (through inflation) are an option due to Greece’s Euro membership, default seems to be the only way out. That will cause a drastic downgrading of other sovereign debt - from Portugal, Spain, Ireland and Italy. In our humble opinion this can only mean that the Euro will become weaker against other currencies, especially the dollar.
It must be said that practically all advanced countries are proceeding to a place where the sun doesn’t shine often. Greece is a horror in its own league, but most other western countries have also overpromised and are thus carrying longer term debts averaging about 400% of GDP. Does anybody earnestly think that those obligations will ever be paid? In fact they will somehow be paid, but the transaction money’s real value will be a fraction of its present one.
All longer term indicators point to only one solution: debt liquidation through extended high inflation. Therefore we need our above-mentioned gold allotment. Perhaps we should even buy more than 10%. This is a question of each individual’s risk appetite. Gold is definitely not risk free, and it yields no income from dividends or such. But it’s an insurance against total disaster, when paper money collapses as it eventually always does.
A root evil of our times is the universal unwillingness to expose the population to truth and pain of any kind. Incompetents, imbeciles and the recklessly profligate are all being protected by governments and central banks against the consequences of their follies. It’s not your fault if you live beyond your means and buy a house you can’t afford. No, the evil bankers did it to you and it’s the government’s responsibility to bail out every speculator and idiot.
One is tempted to buy shares of Goldman Sachs because this greedy and arrogant kraken of finance plays the game we’re in best. I haven’t bought it yet, instead I like shares like Exxon, Shell, Roche, Deutsche Telekom etc. because they have strong cash flows, reasonable dividends and are almost certain to survive future catastrophes. For gamblers I’d add Citibank ( C at the NYSE ). In Asia I look at the Philippines – they will have an election next month and whichever way that goes, the Philippines are likely to get a better government than the present one.