Our last market update on June 30, 2011 stated that we expected the debt ceiling to be raised, albeit at the eleventh hour. Sure enough, Congress has passed a debt ceiling increase and reduction package which appears to lean toward austerity in the coming years. The good news is that we are now starting to get some real visibility regarding our forecast, as both domestic and global economic indicators clearly point to a slowdown. We also anticipated that if there was a serious commitment to downsizing the government and reducing spending, we would see stocks sell off, but treasuries, gold and the dollar would rise.
We believe there is a high likelihood that domestic and foreign stocks will continue to decline over the next several weeks. We have already deployed some countermeasures against that, as demonstrated by last month’s positive portfolio results despite a decline in the stock market, and we may increase positions in treasuries, cash, and bear market funds going forward.
We reiterate that since the Lehman Brothers collapse, our research has been indicating that the measures taken by the Federal Reserve and developed governments will not prevent the consequences of massive global excess capacity. We still are quite concerned that the markets will trend lower, possibly even retesting their March 2009 lows. Europe and the Euro currency are precarious to say the least. Even though many believe we might be downgraded by ratings agencies, US Treasuries are still the safest debt instrument available. Remember that of all the AAA rated bonds in the world, half are backed by the good old USA. Even if there was a downgrade, there simply is not enough liquidity elsewhere to meet the global demand for safe bonds, especially in light of the growing evidence that we may be headed into a double dip recession.
When it comes to risk, I am generally a coward. If I’m in a cabin in the woods and see a bunch of bears outside, I am not about to make a break for my car. However, if there is enough visibility to assure me that I can get there without being slaughtered, you better get out of my way. When economic times are uncertain, preservation of portfolio capital is crucial, so that when the bears go away, you still have the ability to get back in, limbs intact. We are not concerned about a 60 percent downturn in domestic stocks with a 30 month retrenchment, we are concerned about a 60 percent downturn with a 10 year retrenchment. Our research indicates that in a secular bear market like the one we are currently in, combined with the significant structural economic problems we face, the latter is the more likely outcome. Secular bear markets do bring investment opportunities, and we will continue to take advantage of them as market conditions unfold.
In the meantime, defending your hard-earned principal is our primary objective, and we take that responsibility very seriously. Please call us if you would like to discuss you portfolio, and feel free to share our insights with your family and friends. We look forward to hearing from you!
John L. Brotherton, CFP®