The Perils and Promise of Investing in 2013
Houston, Texas, United States
The new year we now face will have it's own distinct flavour. With a roaring Bull Market at it's back, an executive branch of Government that no longer feels constrained by the worries of re-election, and a world that found itself 'still there' after the Mayans said it might end, or at least change radically, one might expect a break from the contentious and disturbing trends of 2012. It seemed as though the game of mutually assured destruction by the two major parties, wrestling with inconceivable levels of debt, and the circus of the media coverage, which trivializes even as it draws our attention, has worked it's magic, as intended. Complacency is growing with regards to risks, and people are getting comfortable with their own patterns of denial.
Markets are said to 'climb a wall of worry', and by that standard, last year was a banner one for that principle. The end result seems to have been, as we turn the page into February, that investors have settled back into a sense that maybe many of the ongoing threats to the markets can be still be deferred. Or perhaps the threats were never all that real anyway, being a set of orchestrated events by politicians with agendas, and so therefore the perceived risks can and should be disregarded. People naturally turn to explanations that keep anxieties compartmentalized, and our system works overtime to provide myths for this purpose. The news coverage seems to be 'just enough' to give the impression that 'a process' is at work, and some people in government, are really 'earnestly working' towards problem resolution and the common benefit of all, despite evidence to the contrary.
Appearance aside, what is the real
state of things? Where should a person be putting his or her
retirement money? Where to put the cash for a child's education?
Is everything really 'just fine', as the Wall Street chorus insists?
The markets since 2009 have been the beneficiary of an extraordinary levitation act, brought on by the panic of 2007-2008. The Government pumped a tremendous amount of money into the system and the stock and bond markets in order to prevent an economic holocaust, that the Wall Street bankers so carelessly took us close to. It's hard to overstate how sick the financial system really was, and what it took to stabilize it. Many people have been mislead by the mainstream press into thinking that the bailouts were only in the range of hundreds of billions of dollars, (chump change, nowadays) and all of it was supposedly paid back, with interest. Nothing could be further from the truth. The reality is, that at least 29 trillion(!) was doled out (as per the Levy Economics Institute), and the bailouts have never really stopped, and no, Virginia, the bankers didn't pay us back. Nice guys they are.
O.K., that's grim, but how does that impact investing? Does it change anything?
Yes, it does, a lot. The Federal Reserve has purchased trillions of dollars of bad assets, and that sits as inventory on their balance sheet. Direct monetization of new bond issuance by the Treasury Department through the Federal Reserve is now near 90%, as most global investors have fled the U.S. credit markets. In spite of all the cheerleading, the U.S. Government has been warned repeatedly behind the scenes by other governments, as well as major ratings agencies, that we only have a relatively short time left to straighten out our deficits and do some kind of debt restructuring, before downgrades to our national credit worthiness occurs. Such a downgrade will wreck havoc with both our bond and stock markets. It would most probably have a negative impact on our dollar, as well.
In seems that the markets are anticipating problems. A formation known as a 'terminal diagonal' is nearing completion. The presence of this pattern can also relate to the 'presidential cycle' which historically means that markets under perform (or worse) at the end of an election cycle. This is particularly true of an incumbent. A snapshot of this pattern is shown at the top. The direction should soon turn from up to down.
So what in the end will an investor have to do to preserve wealth with all of these dark clouds gathering? Well, if you decide to stay in the market, be defensive. If a bout of severe inflation hits late this year or into the next, real assets dealing with necessities will be the best bet, as in energy and food, not so much housing, as higher interest rates probably accompanying a crisis will do great harm there. If you are young and strong and able enough to consider it, look at acquiring rental properties in 'somewhat affluent' areas, but be prepared to do some of your own maintenance 'in house' to save costs and overhead. Above all, consider some precious metals, but be careful where you store them, and be careful who knows you have them.
It's hard to stress enough how truly unreal everything is right now, and what an emotional shock we all will face when the true magnitude of our problems becomes undeniable, so be sure also to cultivate whatever spiritual reserves you can, as many difficult tests lie before us. Reach out to friends and family and discuss difficult scenarios, and what you might do to counter them. Rest assured that behind the facade of normalcy, your elected leaders are doing this very same thing, not for your interests, but for theirs (of course).
Last, notice something possibly important, if you're superstitious. Though we survived the Mayans and their calender thing, this year ends in '13'.
Note: Chart courtesy of StockCharts.com