"And if you said this life ain't good enough
I would give my world to lift you up
I could change my life to better suit your mood
'Cause you're so smooth"
What mood is Mrs. Market in? Is she bullish or bearish? Is she ambivalent or certain, apathetic or concerned?
She's a fickle mistress, but who could blame her. After all, she is made up of the collective intelligence and collective emotions of all of her participants. Some times her emotions run to the ebullient, while at other times she is deeply morose. Maybe I could change my life to better suit her mood!
Lately her mood has been more ambivalent, almost apathetic, and who could blame her. It's hard to be upbeat and cheerful when your returns for the last five years have been negative (S&P 500 -0.50% annualized), when 10-year bonds yield 1.50%, and your cash generates negative real returns. It hardly makes it worth getting out of bed.
The other problem is she's smart, wicked smart. She knows our problems, and she knows how to fix them. She knows that you don't fix a debt and entitlement problem with more debt and entitlements. She's watched our elected and unelected officials repeat the same mistakes over and over again hoping for a different outcome. Borrow more money to "stimulate" the economy. Bail out banks so they can keep lending to over-leveraged consumers. Lower interest rates to zero, and print money to buy your own debt, in the hope that it will instill confidence in the markets. She laughs at the political elites belief that we can all grow wealthy by borrowing and consuming, instead of producing and saving. She shakes her head every-time she hears them state, that a government, which produces nothing, can grow our economy.
She's hopeful that we can still come to our senses. She understands that businessmen love to grow; it is their inherent nature to grow their businesses, their profits, and their net worth. They find ways to overcome obstacles, they're creative, and optimistic. Politicians, on the other hand, believe that they have a superior ability to spend other peoples money, they focus on how to divide up the pie, not on how to grow it.
We've always had this tug-of-war between growing the pie, and slicing it up, and more times than not, as a nation, we've chosen to grow the pie. But she worries that this time the pie slicers may have the upper hand. It scares her to think that for over a generation both parties have been telling our citizens these lies. We've set up a system that rewards those who go into debt with tax incentives and bailouts, while we punish those who save and invest with taxes and inflation. The incentives are all wrong and they've been wrong for some time now. The facts aren't pretty. In 2010, 48.5% of Americans lived in a household that received some form of government assistance. That's up from 30% in 1982, and will be greater than 50% (if it already isn't) when ObamaCare takes effect. In the meantime, 49.5% of Americans paid no federal income tax in 2009, up from 34.1% in 2001.
Mrs. Market is powerful too. She knows that if she pouts, and sends prices lower elected officials tend to pay attention. Historically, they'd rush to change their evil ways. They'd enact reforms to slash taxes that discourage the investment of capital, and they'd abolish the red-tape that is stifling growth. But times have changed. Politicians hate the thought of anyone being more powerful then themselves. They've silenced her friend, Bond Vigilante, by allowing the Fed to print unlimited dollars to buy back their own debt. And now they're trying to silence her by making over 50% of the population beholden to the government, not the markets.
"Man it's a hot one, like seven inches from the midday sun..." This battle is shaping up to be a real doozy. While she may appear apathetic at the moment, Mrs. Market is eagerly watching the continued spectacle in Europe, the rapidly approaching November election, and the looming Fiscal Cliff. I have a feeling that she won't sit idly by over the next several months as our politicians continue to drag us over the cliff. She still matters, and she still has a voice, unfortunately she may have to shake us to our core before we actually wake up. "Well I'll tell you one thing, if you would leave it'd be a crying shame."
Again, we continue to be very defensively positioned with 40% cash, 25% fixed income, 5% gold, and only 30% in risk assets like equities, commodities, and REITs.
"When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed."
--Ayn Rand
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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