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dcrednek (69.51)

Where do we go from here?



August 08, 2011 – Comments (2) | RELATED TICKERS: GLD , SLV , DBA

Like many Fool fans I spent a good part of the weekend reading and watching commentary on the S&P downgrade of the sovereign rating of the US.  Big news indeed since it hasn't happened since the Great Depression.  So where do we go from here? 

 The simple answer is:  no one really knows, since there are so many moving parts which all depend on infallible humans who more often than not behave in irrational, illogical ways in reaction to circumstances.  Let's try to take a look at the downgrade and other related issues to see what might be made of this traffic jam of global economic circumstances.

 First, the US downgrade:  I will support the simple observation made over the weekend by one of my favorite macro-contrarians, Jim Rogers.  Savvy investors knew that the downgrade of the US sovereign credit rating was long overdue----AND DOESN'T REALLY MATTER.  Japan's interests rates are still rock-bottom and they are a AA-.  Another thing that I agree with when it comes to Rogers' take on the US situation is that Bernanke will probably turn-on the printing presses to pay down some of the total national debt and he and other policymakers will continue to find ways to avoid a day of financial reckoning.  There are hundreds of US companies and municipalities that are currently bankrupt, and even more if it were not for bailout programs that have propped-up others (similar to the way the Japanese government propped-up companies for the past 20 years...."zombie" banks and companies).  What's the answer?  Simple:  allow these ailing companies and local governments to fail, force investors to realize the losses, and start over.  Yes, this will be an awefully hard hit to the economy in the short run. Like Rogers I think that the US will never (or at least another decade...or two) recover from its current situation if it doesn't take the harsh measures required to purge itself of its systemic problems (too much debt, too little savings, too much social welfare, too little financial responsibility).

The Eurozone is really not in much better shape.  It's becoming increasingly clear that the Germans, the strongest, largest, and most responsible of the Euro members in terms of balance sheet preservation, is not the least bit interested in going deeper into debt to bail-out its fiscally irresponsible neighbors.  Nuriel Roubini has written and commented on this subject for quite some time but it seems his thoughts have only become news in the last few weeks because his forecasts seem to be coming true.  The Europeans might want to consider how to deal with a social welfare system that far outstrips taxation income before the single currency becomes a footnote in history.

So what assets might be good options for the next few years.  I hate to say that I was completely wrong about gold and silver over the past few years. While inflation has not yet appeared, the price for both of these metals has crept upward in anticipation of the sort of situation we now face.  Is it too late to get in?  Maybe not. If the Federal Reserve were to print more money to retire government debt and inflation were to rise then gold and silver prices will do so as well.   The first and most basic rule of investing is preservation of capital: returns are secondary to protecting your principal from permanent loss.  Second, no matter what the global economy does or whether one is employed or jobless, everyone must eat.  So look to basic commodities (especially agricultural commodities) for another way to preserve investment capital.  And last but not least, let me take one from the playbook of Jeremy Grantham and suggest high-quality blue chip equities, especially those that have cash and cashflow that equal or exceed their total debt.

2 Comments – Post Your Own

#1) On August 08, 2011 at 12:19 PM, leohaas (30.01) wrote:

"Like many Fool fans I spent a good part of the weekend reading and watching commentary on the S&P downgrade of the sovereign rating of the US."

Looks like you wasted the better part of your weekend!

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#2) On August 08, 2011 at 7:04 PM, rfaramir (28.67) wrote:

"most responsible of the Euro members in terms of balance sheet preservation"

That pool sets a pretty low bar. I hear that technically every Euro nation is above the deficit threshhold (3%?) set in the treaty that created the monetary union. I suppose any of them, at any time, could declare the Euro a bust according to the treaty. If Germany herself got below that level (even they are above it, if only by a little), she could end the drag on her economy in one fell swoop.

I agree with pretty much everything except the downgrade not mattering. Sure, Treasury interest rates won't rise much if at all in the short term, as there is hardly anywhere else to go. But eventually...

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