America in 2010: A triangle of trouble
Summary
The school teams are divided: some argue for an improved economy; others don't. We belong to the second "doubting Thomas" school, and outline a triangle of risks awaiting the investor in 2010.
If you want to preserve your capital, we show you how to have a preponderance of fear, as opposed to greed, in your portfolio.
As we pointed out yesterday, the world has become a giant disclaimer: nobody carries any risk anymore as the government will bail them out. But how long can markets tolerate this fiscal turpitude?
Topics Covered
- Worse Economic Time®
- Fed fights
- Budget fights
Background
Subscribers know of our ill-placed bearishness, one which may have preserved capital since March - but one which has levied a high opportunity cost in terms of reaping stock market gains.
Nevertheless, we stick with our views and outline why 2010 is the year of fear - and not of greed. I see three tug of wars going on simultaneously, hence this triangle of trouble.
1. Worse Economic Time®
We have suggested for many moons that the Economic Clock® keeps signaling worse times ahead. Indeed, in my TV show today we plagiarized a predecessor's thought that the actual unemployment rate is 17% - instead of 10%. This higher rate is the result of adding part-time and disillusioned job-seekers to the ranks of the unemployed.
When will the market's subconscious move out of denial and into acceptance of this worsening Economic Time? When it does, expect market ructions.
2. Fed fights
There was an interesting article in today's perspicacious Financial Times on page 2 about how the Fed may split its liquidity policy from its monetary policy:
- Liquidity policy. By this is meant how fast the Fed will raise the discount rate - the rate which the Fed charges banks when it directly makes emergency loans to them. Another layer of liquidity policy is just when the Fed will stop pumping so much liquidity into the system, e.g. via quantitative easing, and
- Monetary policy. By this is meant primarily when the Fed will raise its Fed Funds rate - the rate at which banks lend excess reserves to one another at the Fed. Another layer, though, is to what degree the Fed is still allowing money supplies to grow. My indicators show that already since this August the Fed has been easing less vehemently...
Whatever way you cut the cake, expect more fights within the Fed about when to tighten liquidity and monetary policy. That public boxing match will disrupt markets, too.
3. Budget fights
By this we mean fights primarily on Capitol Hill between those who want even larger deficits, and those who want to start reining them in. In the first camp belong the cabal around Congresswoman Pelosi, and in the second camp belong, inter alia, members of the Pew-Petersen commission which just yesterday warned of the effects of higher deficits.
The reason for the fight has everything to do with mid-term elections next November. Those advocating higher budget deficit ceilings want to spend more in order to increase their popularity; those wanting to spend less, on the whole, probably are not standing for re-election this time around...
This bickering further will disrupt markets, which will not want to see ever-higher budget deficits, so expect a form of a bond market crash if and when Congress approves higher budget deficit ceiling.
How to Make Money Off This Idea
- Always consult your financial advisor first.
- Focus on secure staples, such as
- gold (whether physical or in the form of an ETF, but NOT gold mining companies)
- consumer staples
- credit default swaps (as many bonds will be going to the wall), and
- short-dated bonds (which are less volatile than their long-dated cousins)
- safe-haven currencies like the yen, dollar and Swiss Franc (in light of the unwinding of carry trades as well as of increasing tensions in the Muddle East).
