Everyone wants to know what the future holds for them; what type of person their kids will grow in to, what will our country look like, will I have enough money to retire, will I remain healthy? As far as we know, the business of forecasting the future goes back at least a few thousand years. Over the years the tools used for forecasting have changed; from tossing bones, reading tea leaves, entrails, palms, cards, and crystal balls, to new and improved computer generated models. While the methods may have changed, the results are still the same...no one can forecast the future!
I gave up trying to read the markets entrails many years ago, and have adopted a more zen-like approach of "being in harmony with the markets". This is not as easy to do as it sounds. We are constantly bombarded with noise. What do you think will happen if X wins the election? What will happen when we run over the fiscal cliff? What will happen if the Euro dissolves? Who will Tom Cruise marry next? Will the Steelers make another Super Bowl run? While it may be fun to prognosticate and debate the many unknowns the future holds, it is sheer folly to manage an investment portfolio based on prognostications, no matter how educated.
The best that investors can hope for is a thorough understanding of our current environment; what is working, whats not, and why. Understanding the present and positioning our portfolios appropriately is the soundest investment policy. An active tactical asset allocation strategy is all about being in harmony with the markets. A static portfolio (i.e. 60% Stocks/40% Bonds) based on historic returns amounts to hiding your head in the sand and hoping that history repeats. While building a portfolio based on the future's unknowns is simply folly.
Economists have the unenviable task of trying to forecast something as complex as the worlds economic performance. Their task is simply to try and determine what all of the worlds inhabitants are going to do; how many will have jobs, how many will buy, what will they buy, how long will they live, will their governments remain stable, will they act rationally, and about a million other factors. Not a small task, but a task that their hubris allows them to willingly embrace. And it doesn't hurt that many are also paid handsomely for their prognostications.
Historically this was all well and good, and as investors we could simply choose to ignore their entrails reading, and instead focus on things like company fundamentals. But, what has become troublesome is that the worlds economies are now being driven by these soothsayers. Central Banker economists have evolved, from trying to steer the economy by setting short-term interest rates, into full-fledged Central Planners. These Central Bankers/Planners now intervene in a variety of markets (commercial paper, mortgages, and long-term Treasuries) as well as "nontraditional" interventions that allow the Fed to allocate credit to specific markets and institutions.
Stocks, bonds, gold, oil, and commodities all moved dramatically this week as unelected European Central Bank president Mario Draghi told the world that he would indefinitely continue printing money to buy up the bonds of Europe's most beleaguered country's. These unelected Central Bankers expose tax payers to increased risks, and they have also become gargantuan regulators. We've put these Central Bankers/Planners economists in charge of our currencies, and by default, our economies. This is extremely scary. The Fed has crossed the line. We are fully aware of the dismal track-record that Central Planners have. And we are right to be worried about the hubris of a few individuals, and their belief that they can forecast the future...no one can forecast the future!
Now I have nothing against Ben Bernanke, I'm sure he's an OK guy just doing his job. My problem is that his job, forecasting the future, is doomed to fail. Unfortunately his increased power, and certain failure, will have a significant impact on you and I. These are the cards we've been dealt, and as investors we have to realize that the game has changed and our playing style must change with it. Adapt or die.
Think I'm being a bit harsh. Here is a brief video of some of the Chairmans prior clairvoyance.
Be careful out there,
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