Let’s talk about the possible effects on investments of the government game of chicken being played with our economy.
There is very little doubt that if the extremists drive us over a cliff in the first two weeks of August, stock markets around the world may tumble quite far down. On the other hand, if there is a solution, especially a long-term solution that increases revenue and provides cuts in entitlements, our domestic stock markets may rise quickly and strongly, maybe even forming a brief euphoric bubble. Markets in other countries may rise, as well.
I’d like to make a distinction here between what’s desirable from a social standpoint and what might raise the value of stocks. We may decry cuts in Medicare and Social Security, but corporate America is on the other side of that fence. In fact, the conversation I am having with many of you is largely about how, for over forty years we have fought, organized and voted against a corporate-controlled government and society. What is really unprecedented in our lifetimes is the possibility that corporations have lost control of the Republican Party to their idiot fringe. Recently, organized by the U.S. Chamber of Commerce, the Business Roundtable, the National Association of Manufacturers and other groups, 450 CEOs sent a letter to all members of Congress warning of damage to the economy that would result from the default that would follow a failure to raise the debt limit.
A cut in entitlements and a destruction of union power would be welcomed by corporate America and would probably result in rises in the values of their stocks,
but, it is not in the interest of corporate America that our economy be driven off a cliff. It is not in their interest that the dollar cease being the international reserve currency. It will not be good for corporations if interest rates double, along with the costs of their debt.
Corporate executives hold the campaign purse strings for the Republican leaders and even the Tea Party Congressmen. Are they whispering in Boehner’s and Cantor’s and McConnell’s ears, saying “Bring them down to the wire. Get every concession you can from these Democrats, then give in and compromise on August 1st”?
Or, are their voices being drowned out by the din raised by the privatization, anti-government, shift all wealth to the wealthiest Tea Party fanatics?
What about unemployment and the collapse of the consumer? What about the potential defaults in Europe? They will likely hold back a run-up in the stock markets, but manufacturing in America has been rising for a year, our dollar is so weak that our exports are at record levels. With seventeen percent of American workers under and unemployed corporations are enjoying historic productivity. No wonder their profits are rising. And this is why there is pent-up demand for higher stock prices now.
Why is unemployment so persistent? Some of the reason is that the Federal Reserve Banks stimulus is not being loaned out to small businesses (the largest creators of new jobs) as the Fed intended. Instead the banks are investing the money for a smaller, but safer profit in Treasury bonds, bills and notes. Also, about sixty percent of the QE2 reserves sent by the Fed to the banks went to foreign banks instead of U.S. banks. The fix is in, and it ain’t there for working Americans.
Where do the things we believe in come into this discussion? Equal opportunity, the right to organize, human rights, environmental sustainability and justice, social and economic equity, fairness, a safety net for the poorest, universal literacy and healthcare, reductions in the size and influence of the military-industrial complex, a peace dividend, etc.? How about Democracy? This is a contest between the corporate right and the idiot right. Our issues have not been on the table since the election of 2008. We will just have to work on them locally and on our own for a while. The pendulum swings, and we are the momentum.
Back to our investments: If the crazies win, investing will be very difficult and will take some agility. We should probably start talking about this right away. If the corporations win, the debt ceiling is raised and the Democrats negotiate away substantial entitlements, the U.S. stock markets may thrive and rise quickly and far.
So, how to invest? Where to hide? The highest yielding good-credit bonds, those with the longest time to their maturity dates, will likely lose value if the amazingly low current interest rates begin to rise, if the economy begins to recover or because the government defaults. Short-term bonds should be safer as to keeping their value, but they are currently yielding less than one percent.
As I have said in nearly every newsletter for the last twenty-five years, if any of your money is aimed at a short or mid-term need, keep it out of the stock market. Right now keep it in short-time-to-maturity bonds or cash. You will have to forgo any significant income in order to preserve principal value.
Keep your longer-term money in the stock market. I think the idiot right is going to finally cave to the people (and corporations) who have the money. I think that there is a better than fifty-percent chance the stock markets will rise by the middle of August. But if you are more concerned about losing value in the near term, hold out in cash for the next couple of weeks until we can tell what’s going on with the debt negotiations. Any new money coming in, hold off investing it until the first week of August. Then let’s talk.
There is also a huge chance that what will actually come out of all of this government finagling is a band-aid, short-term increase of the debt ceiling with minimal cuts in the deficit and with nothing resolved. In that case I expect the market may continue to move sideways, going up and down within the same range and with the same kind of volatility we have been experiences for the last three months, perhaps all the way into the 2012 campaign.
It’s a financial planning truism that everyone should have an emergency fund. We usually keep such accounts in a money market with a bank or credit union or mutual fund family. But watching Haiti and New Orleans a few years ago and more recently Japan, I am more inclined to recommend that we all keep a stash of actual cash in a safe, fireproof place in the house. How much? How much would you need to maintain a very bare-bones existence for three or four weeks until the banks reopen? Or until you can even travel to a bank? Make sure that some of your cash is in small bills, since few will be able to cash them.
Obviously we here in earthquake country should keep water, food, first aid, a wind-up radio, etc., but you don’t need me to tell you about that. And there are some great East Bay and San Francisco city city-sponsored courses which discuss what’s useful assuming zero outside help of any sort for seven days & then only occasional airlifts of injured, and drops of food and medicines.
Should you keep gold as an emergency currency for real disasters? Certainly some people are doing just that. But ask yourselves, in a true, temporary post-earthquake road-warrior existence, what will you find valuable? Will you want to accept gold as payment for food or water? How would you value it? Create change? I tend to think that in a really hard time, with services discontinued, perhaps for weeks (months?), people will more likely trade things that have value themselves. Historically, the things that have held value in war zones and areas of devastation have been food, water, alcohol, medical supplies, pain killers, antibiotics, drugs and cigarettes. And, again, I recommend that you add in a couple of thousand dollars in small bills, $10 and smaller.
Just a thought.
I’ll be following up soon with another newsletter, but for now,
Up the Rebels!!
Lincoln Pain, CFP®/AIF®