Thursday, November 17, 2011

World problems and November 23rd:

The current worldwide problems have so many twists and turns you just don't know what to do next. Let’s take a look at what I am seeing right now.

Europe: Every time one of the PIIGS (Portugal, Italy, Ireland, Greece & Spain) appears to have or not have a solution to their debt problems your investments go crazy. The DJIA can move up and down 500 points in a day. The problem as I see it is that we have five countries with debt problems and only one or two have been working on their problems. So does this mean we will continue to have 500 point swings until all five countries get things under control? Probably?

United States: The Presidential cycle tells us that we have 7 ½ months before the market volatility will slow down in the United States. Our unemployment is way too high, with no hope to go lower until after the election next year. Does that last statement surprise you? It should not. The Republicans do not want the country to get better, or they won’t be able to put a Republican in the White House.

Inflation and Interest Rates: Here the government maybe down right lying to us. They tell us that we have no inflation and it is better for the recovery to keep interest rates low.

I was buying this for a while. Then I heard the statement, “If Italy could pay 2%, rather than 6% on their bonds, Italy would not have its current debt problems.

That got me thinking, since I was also told that higher inflation would help the recovery rather than hurt it. With inflation housing prices would go up, companies could raise prices, profits would go up, individual wealth would increase, companies would have a reason to start hiring and the economy could get better.

So why has the Federal Reserve stated that they will keep interest rates low for the next two year. The Government maybe afraid if inflation and interest rates were to be allowed to move freely, the interest rate the government would have to pay on their bonds would go up so high that the United States could be in the same shape that the PIIGS are now.

The Super Committee: Before you start thinking of Thanksgiving turkey or holiday shopping, there’s a big hurdle we have to surmount. The Nov. 23 deadline for the “Super Committee” of the U.S. Congress to come up with at least $1.2 trillion in cuts to the federal budget deficit over the next 10-years. If they don’t work out a deal, automatic budget cuts will take effect, as ordered by last summer’s debt ceiling agreement. While we’ve been watching Greece and Italy, this small group of legislators has been trying to work out an agreement on how to do this. Neither party wants their members to give in to an agreement that does not help their own party in the coming election.

If there isn’t some give and take now, the consequences could be draconian cuts in everything from the military budget to all social programs, not to mention what this would do to the stock markets.

There are other possibilities. The committee could ask for a deadline extension. The goal is to have the Congressional Budget Office “score” the savings in time for Congress to pass the package by the end of the year. They will only have four weeks to do that, after the 23rd, if they want to go home for Christmas.

If the committee is deadlock and fails to agree, it could put the United States in the position that Italy and Greece are currently in.

If they could come to agree on even deeper cuts than the minimum, it could set America back on the right course for the next generation. Today's voters would not like what it would take to do this, but it would have a very positive effect on the future of the country and the stock markets. What do you think the chance of this happening is?

The results that come out of the Super Committee will create a significant turning point for the economy. So we want to be prepared to adjust your long-term investment allocations, but we don’t want to jump before thinking about the consequences.

If the Super Committee and Congress can’t come to an effective resolution, gold will surely soar; inflation or debt default will push interest rates much higher. The stock market’s immediate reaction would be downward as market participants don't like uncertainty, but stocks historically have been a very good hedge against inflation. If the Super Committee does not come up with a solution by November 23rd and the stock markets fall; any cash you currently have will look pretty good. Yet, you will need to get that cash invested while the markets are down to profit from our government’s inability to do what it should do.

So how should you invest if that happens?
That just went out in my latest newsletter to clients.