2012 Smart Money
2011 Smart Money
2010 Smart Money
2009 Smart Money
2008 Smart Money
Special Letters To Clients
It's A Hot Mess Out There! | 2.23.11
It's A Hot Mess Out There!
Written by Keith Springer
February 23, 2011
Click links in blue for more information
From the fires in Cairo to the shores of Tripoli and all the way back to Wisconsin, it seems like the whole world is on a powder keg ready to explode. Why you ask? Very simply: More money going out than coming in…and it’s a global predicament!
We are all aware of the financial problems here at home, with tax revenues down and states nearly bankrupt. The protests in Wisconsin are simply a symbol, as well as a precursor for what we will increasingly see throughout America for months to come.
The Middle East is exploding for the same reasons, but on a much more personal level. The people of developing countries spend much more of their disposable income on commodities, aka food, and now that commodity prices are soaring the cost of food is going through the roof. As emerging economies boom, food prices skyrocket. It is much more of an issue for the people of developing nations because they buy raw commodities in bulk and “make” food such as bread, whereas most of us buy finished products.
Unfortunately, this current crises is a byproduct of own policies. To combat the current recession here at home, Bernanke and the Fed initiated their Quantitative Easing (QE) programs. The two main goals for the QE was to create inflation (to combat deflation, explained below) and to lower the value of the US Dollar. Because global commodities are priced in dollars, when the dollar loses value, commodities go up by default. Therefore, our repeatedly shortsighted foreign policy is actually causing the unrest in the middle east. This is discussed on a recent CNBC interview. This reminds me again of why Iran is “now” so strong and such a threat. Because we took out Saddam Hussein’s Iraq, which was Iran’s natural enemy and kept them in check…but I digress.
I know it sounds ludicrous that our beloved government is purposely trying to create inflation, but we must understand that the government wants prices to rise (inflation), but only slowly. If prices are falling (deflation), that means demand is slack and prices are being marked down, which trickles up through the economy to the retailers, manufacturers, and even raw materials producers, who all must cut costs by cutting salaries or laying off workers. So while the government wants prices to rise, they do not want rapidly increasing prices. If prices move up too quickly without a corresponding move in wages, then the population sees their standard of living fall. People are not making more, but daily living costs more. That hurts. Generally a 1.5% to 2.5% rate of inflation is considered just right.
The current unrest is likely just a catalyst for the much needed correction. The fear is that oil will rise so much that it will choke off global economic growth like t did in 2008 when the price for a barrel of oil was over $160, only to plummet to about $30. OPEC is aware of this, and has announced that the flow of oil will not be disrupted. Nevertheless, fires raging in our oil producing allies is not a comforting sight. I suspect that this correction will be short lived and not deep enough to let the people “in” that have been waiting for it. Turmoil like this stands as a reminder to make sure you have the proper financial plan, and that you are taking the absolute least amount of risk for the return that you need, not the one you greed. Our TDT™ Protected Dividend Strategy is tailor made for this very market.
The good news for the stock market is that stocks like inflation and hates deflation. That’s why we have been in a monstrous rally. The bad news is that the upward slope in the Dow and the S&P 500 has matched the increase in the Fed’s balance-sheet holdings since early 2009, with stocks dropping when the Fed quit buying securities from April to September last year. That tells me that the stock market is essentially addicted to the stimulus and once QE stops, so will the rally. Therefore, investors have to be very “tactical” here, and avoid a buy-and-hold (buy-and-hope) approach at all costs. When the party’s over, everything will go down in unison and being “diversified” will not protect you just like it didn’t last time.
If you have CD’s coming due, cash earning little or other accounts that are underperforming, give me a call and let’s talk about them (916) 925-8900.
Regards -Keith Springer
For Keith Springer's Book
"Facing Goliath: How to Triumph
in the Dangerous Market Ahead"