A Chimera of a Recovery
While I’m personally on the road to recovery after my eye operation, with heartfelt thanks to all you well wishers, I strongly doubt whether the same can be said about the world economy. Yes, stocks are up 50% since the March lows, but this pleasant development was rather divorced from the soggy real economy and due more to boatloads of essentially free money which were printed by our central bankers and largely dispersed into speculative investments.
Isn’t it ironical: we, the people, have borrowed too much over the last 20 years and need to reduce our debt burden. Our collective agent, the government, can not bear to see us suffer, and continues therefore borrowing on our alleged behalf. But instead of handing the extra money over to us to enable us repaying our debts or continue consuming, it shovels the money to zombie banks and deadbeat companies. It seems the problem of too much leverage is going to be solved through even more leverage, not of individuals this time, but of governments representing those individuals. Is this 21st century economics or a circus trick? You, Dear Reader, may decide.
The consumer, above all the US consumer, was the workhorse who pulled the economy along. This animal is now drowning in debt, his assets are worth substantially less than a year ago, his income is stagnant or falling, the bank won’t lend him any more money and his job is shaky. These are obviously the ingredients of a swift recovery, judging from the avalanche of “good news” we are being fed every day.
Does that mean everything is bleak? Not at all. While I believe the economy is not yet out of the woods and may in fact soon deteriorate again, the markets offer, as always, some ways to profit. Overall, we will probably be in a sideways-down movement for many years to come. But within the trend canal, there will be multiple rallies and drops of 20% or more. Enough to make some money while the monkey is being chased up and down the tree. Of course it won’t be easy to get the inflection points right, but one should try to catch and ride some of the coming waves. Buy and hold is not the recommended strategy now.
Which shares are being recommended? For trading purposes, some of the big banks are ok, they jump up and down like yoyos. If you must keep some long term money in equities, stick to blue chips in energy, consumer necessities and health care/pharmaceuticals. At least you can collect a dividend, if nothing else. Gold doesn’t look exciting short term, but should be held as a worst-case insurance. In currencies, I have no strong opinions presently but I think the European Central Bank has done a rather good job so far and therefore I’d allocate some extra cash to euros.