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Swimming Before A Tsunami

stockmarket002In elections, you must hold your nose and vote for the least undesirable candidate. Sometimes it is better to refrain from voting so as not to encourage the political criminals. Even then, you cannot escape whatever action you took. Your vote, whether cast or not, has almost zero probability of affecting the election outcome. Nor does it refraining from it have any bearing on how you will fare from the result. A cleaner conscience can be obtained from refraining to participate.

Voting in Markets

Such is not the case with markets. You can choose not to “vote” (i.e., by taking money off the table) and alter your outcome. What you do has a direct bearing on your wealth. [level-premium]

Taking your money out of the market is the equivalent of putting it into a mattress. There are no returns on low risk assets today. Zero return does look attractive if the alternative is losses. Unfortunately no one has perfect foresight.

Playing it safe by choosing not to vote with your dollars may not protect you. If you put your money into longer-term bonds in order to get higher yields, you are subject to capital loss if (when?) interest rates rise. More troubling is the fact that yields are below the rate of inflation. Thus, by committing to safety, you are actually committing to a policy of diminishing purchasing power.

Voting in these markets (i.e., staying invested) is like trying to pick the winning horse in a glue factory derby. One is better than the others, none may be very good. One will win this month and perhaps next month, but will it “win” because it is less bad or because it still can run? Relative returns (“my portfolio lost less than the market”) in down markets may provide a sense of pride but absolute returns alter wealth. 

Participation in this glue factory derby depends on one of two beliefs:

  • Some of these horses may still be able to run (with central bank assistance). 
  • High inflation may damage cash holdings more than market performance.

Should inflation truly break out, stocks are likely to run a good deal further than today’s levels. Under such conditions, holding cash ensures purchasing power losses.

Financial Chicken

From a fundamental standpoint (economic conditions, valuations, etc.), it is difficult to justify putting money into US markets. Furthermore, damage done to the economy by current Administration policies is likely to make matters worse. Without a substantial change in such policies, there will be no recovery. Conditions are even worse overseas, especially in Europe and Japan.

Today’s markets force us to play a huge game of financial chicken. Some may remember the “game of chicken” played with automobiles. Two drivers drove directly at one another. The one who pulled out first was a chicken. If both were too “brave,” death was the possible result.

The Fed has put us into a massive game of financial chicken. Pulling out too early does not make us chicken, but it may alter our lifestyle. If inflation roars, your purchasing power will be substantially reduced.

Pulling out too late could produce a death of your net worth.  Downdrafts of 50% or more may occur. That is also the equivalent of financial death for anyone near or beyond the end of their working careers.

We are swimming in water with an approaching tsunami. We don’t know when it will hit, but we know it is coming. Getting out too soon may be costly. Staying in too long surely will. Will we have enough sense to know when to get out? That is the essence of “investing” today.

MARKET ALERT: 

There could be some rough times in the stock market this week if the chances have increased for a September tapering by the Fed. Zerohedge believes that to be the case.

We have a dead-in-the-water economy with stock prices at record highs. The last time the Fed even discussed the possibility of diminishing QE, markets were badly shaken. Bernanke then went out to explain that he didn’t say what your lying ears heard.

Make sure you have loss-protection in place for your positions.  A big one is coming, although no one knows when.

Gold which has been showing some recent life is not immune. Nothing is. My stops on all positions will be moved closer before markets open tomorrow morning.

Be cautious!

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