What’s Your Twenty?

Every now and then I attempt to take a step back and picture, albeit ever so vague, the general economy. We look for some primary aspects which highly outline the future and that which we, as investors, can expect to witness.

Sentiment – Although this would probably be the most intangible and sporadic of them all, it would nonetheless serve as both the most potent and most central when looking from the eyeglass of the observer.

An experienced trader once pointed out that when configuring the price-per-earnings ratio from a sentimental standpoint the range on the DJIA for example (with a variation of 8-20 times earnings) would be between 4500 and 14000. Notice the margin for downside.

The general sentiment at this point would generally be bullish. Many speculators would argue that they have allocated a portion for cash but what they don’t consider is the amount of leverage that much of that capital is proportioned in. Hence, if the markets go sour we would have a dead cat bounce and wind up right where we started. At this point in time the most important thing to bear in mind is that possibilities must all be considered not the mere probabilities.

Debt – In a generation where deficits and debt don’t matter it is always prudent to the successful investor to remember that which the Roman Empire, the Spanish Monarchy and now the United States Government has all forgotten, Deficits Matter. And money that has been borrowed will one day be repaid, albeit by us or by our children and grandchildren of future generations to come.

We live in a credit bubble quite similar to what the US experienced in the late 1800s. Farming was rampant and profitable, business flourished and the easy money flowed. Then came the crunch and all the corn farmers that had leveraged-the-farm on better machinery and luxuries of debt faced a serious downturn and in many cases bankrupcy. We too have lived in such prosperous times with when money was easily available for all those who sought. These times end though and history hasn’t failed to back that up.

Stay conservative and with hard tangible assets. The vulnerable are only those who have bought heavily on margin and invested in things that no one understands.

The Fed – It has always amused me how much respect the Federal Reserve has received pretty much since its inception in 1913. One thing is for sure, when Greenspan and his successor Bernanke have spoken the street has listened and when the Fed announced the Federal Funds rate investors listened even harder.

Ultimately, we perceive that the next few decisions to be made by the Fed will be extraordinarily important to the future of the global economy as a whole.

Let me explain the economic repercussions brief. Interest Rates control both Corporate Earnings and Housing. Earnings and Housing both strongly affect the Stock Market and Employment. Stocks – hence pensions – and jobs – hence income – are just about the two pivots that support the sentiment of the people. Once the US sneezes the world catches a cold… the global economy slows due to lessened demand… emerging economies stall altogether along with their high-flying stock valuations… Nations fiddle with interest rates to both battle a struggling economy and promote investing and the cycle starts over.

Basically, whatever the Fed does or doesn’t do over the next few months stands as both primary important and possibly detrimental to the future of our economy.

So what to do?
We strongly advise a careful allocation to both safe and tangible assets along with some short and fluid positions in vulnerable equities, (i.e. the Dollar, Stocks) on the side to be able to buy up bargains in the case of a general deflation. An allocation to the tune of – 60% physical precious metals bullion, 20% Safe Interest or Dividend Bearing assets and 20% Cash/Financial Shorts would seem most appropriate.

We would prefer Silver over gold, physical over financial based, bonds over stocks, Industrial over Emerging and Safety and Low returns over Risk and chance for higher returns. The era in which we currently reside has seen every asset rise while the era we are about to enter may contain a deflation of every financial asset.

Remember, we may experience an Inflation of goods, a deflation of financial assets, together with a stagnating economy.



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