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Apocalypse offers dire predictions of social unrest, wealth destruction and war as the financial era ends with the West drowning in debt and beholden to our Asian overlords. Its spokesmen include Marc Faber of the Gloom, Doom and Boom Report and Jimmy Rogers, formerly of George Soros’ Quantum Fund. In their minds it is over; hoard your food and your gold. Protect your family the best you can. Learn Mandarin.
The Panglossians read the same facts and predict a new era of prosperity for everyone is possible if we will just spend more money. If we run out, the fiat money lords at the Fed and other central banks will just print more and buy the securities issued by their bankrupt governments. Paul Krugman of Princeton and the New York Times is their champion. More debt, they say, will solve the problem of too much debt. We tried to come up with mascots for the A’s and the P’s, but a jackass seems like such a perfect representation of both.
Having tortured this political analogy enough, we will give you our take on the macroeconomic challenge and its effect on the markets. In a world where prosperity is increasing in formerly third world Asia and even Africa, it is hard to cast your lot with the Apocalypse crowd. There has always been a market for despair and human nature tends to be open to it, but buying that kind of pessimism has always been a fool’s bet. Just ask those families who bought bomb shelters in the 60’s in anticipation of Communist annihilation.
It would be great to print our way out of trouble, as Pangloss counsels, but even Chairman Bernanke, the greatest money spinner of them all does not see this as a complete solution. It is merely a way to buy time as markets recover and governments make rational choices. After all else has been tried, government promises and the defense establishment will be trimmed. The thriftier U.S. consumer will move the economy toward more capital investment, slowly making our economy more competitive. Sluggish but positive growth is the likely outcome, but during this fragile adjustment period, the economy is more vulnerable to external shocks.
U.S. stocks appear to be fully valued, but a determined Fed may keep valuations elevated. However, a significant pullback in prices (10% or more) is possible at these levels. Foreign shares are trading at attractive prices and as uncertainty clears, portfolios should benefit from accumulating shares in Europe and the emerging markets. Investment grade bonds remain over-valued. We believe a shorter than average maturity is warranted along with some defensive exposure to TIPS.
The Altavista Investment Team - Fall 2012