Back in October of 2011 we invested a little time talking about the 5 Things You Need to Know for 2012. Now that the year is approaching the midway point we thought it would be appropriate to circle back to 2 themes we touched upon which seem to be playing out and if your portfolio is not prepared for the continuance of these themes then buyer beware.
The U.S. Dollar Matters
At the end of 2011 we offered you the following thoughts:
It’s no secret that Greece, Italy, Ireland, Portugal and Spain are in deep doo-doo (technical economic term) as their debt levels are unsustainable. The end result …..or what John Mauldin has termed the “End Game”… is that all of these countries will need to restructure this debt which in essence is debt destruction.
The mechanism behind this has huge ramifications to the price of the dollar and in return to other financial assets. Follow me on this. As dollar-denominated debt is extinguished – through payoff, reorganization or bankruptcy – remaining dollars become more valuable. Pushing the demand and price of The US Dollar higher.
This will have profound implications for not only the stock market but commodities as well. Understanding how this will affect your portfolio and making adjustments accordingly is a must if you want to have a chance of prospering in 2012.
Many of you may not know this but the U.S. Dollar began creating a bottom in 2008. Since 2008 the majority of pundits have predicted the demise of the U.S. Dollar citing The Feds relentlessness in keeping the printing presses running through TARP, QE1, QE2,Operation Twist and who knows what next. So far with all this extra liquidity provided by The Fed, The U.S. Dollar has been able to maintain price integrity. We have been stating for quite some time that most investors’ portfolios are ill equipped to handle a major advance in the price of The Dollar.
Now with Europe’s issues front and center (again) we are beginning to see an acceleration in the price action of the U.S. Dollar compared to other major currencies as you can see on the chart below.
There are many ways an investor can hedge their portfolio to not only protect their assets but make money from this trend. Since I am attempting to keep this letter brief and the reality is that I don’t know the risk tolerance of each person reading this letter I would encourageyou to contact us or attend one of our upcoming events to find out which may be the most appropriate way to incorporate some kind of U.S. Dollar advantaged investment into your portfolio.
It’s Never Official Until It’s Officially Denied
We offered this cynical view after hearing Treasury Secretary Timothy Geithner tell Jim Cramer on CNBC that there will be no Lehman Brothers type of issues with Europe. For a few months it was beginning to look as if our cynicism was ill placed as the markets trudged forward as Greece defaulted on their debt and no major meltdowns occurred. Well, that is unless you were associated with MF Global’s failure or a share holder of JP Morgan stock when they announced a $2 Billion possible loss that has grown to $3billion according to Bloomberg. Back to the point…..we offered this cynicism because when you do the simple math it becomes obvious that Greece, Spain, Portugal, Italy and probably Ireland have debt levels that are too big for a unified currency without a unified monetary policy.
Now the game becomes very interesting as the recent elections in Europe have replaced some of the previous ruling parties that had worked hard to hold it all together to this point. Now you can expect to see the social acrimony increase with greater potential for chaos in the streets as the peripheral countries attempt to toss austerity and Germany attempts to keep some type of unity to keep their interests protected. Regardless, the writing is on the wall and in this age of financial derivatives it is nearly impossible to guarantee against the potential for failure.
What Investors Should Do
All this should beg the question “What should an investor do?” For years the conventional wisdom given to investors to reduce risk was to diversify. While in principle this is true what often gets left out of the equation is how to diversify properly in the environment we find ourselves within. Throughout the 80’s and 90’s the most efficient diversification was found within a mix of stocks and bonds. A big part of this efficiency was the fact that interest rates continued to decline. Declining interest rates helped stocks as it helped companies borrow and expand at lower costs and lower rates helped bonds as bond prices tend to rise as interest rates fall.
Looking towards the future with interest rates at current levels one must ask what will be the efficient diversification moving forward assuming interest rates stay flat or begin to rise. It is our assumption that in this new environment a portfolio of only stocks and bonds will be ill equipped to handle the landscape. Our solution has been to educate our clients on the use of investments and investment management strategies that are outside of the traditional stock and bond allocations. The industry has termed this category as “alternatives”. While the term “alternatives” is broad and can include many different types of investments and strategies we have invested the past few years in becoming very familiar with all types of investments and through all our hard work and due diligence we have found that there are only a handful of the multitude of offerings out there that are worth your time and money. This work has also led us to the conclusion that investors may be better served to reallocate their portfolios to contain less equities and bonds and more alternatives. To keep the idea simple we have been experiencing good success with a blend that is 1/3 stocks, 1/3 bonds and 1/3 alternatives. Whether this is appropriate for you or not is up to each individual. Regardless, we do believe that investors with lower to moderate risk appetites should investigate the options available to them. In order to help accommodate this we invite you to join us at one of our upcoming events (click here to see a schedule) or to contact us for a portfolio review and stress test.
Until next time enjoy the beginning of summer and remember that difficult things are rarely important and important things are rarely difficult.
The opinions expressed are those of Colby Mcfadden and Quiver Financial as of May 23rd, 2012 and are subject to change due to market or other conditions. This is not a solicitation or recommendation of any investment; always consult a Financial Advisor before investing into any investment. Securities offered through Newport Coast Securities member FINRA/SIPC. Advisory services offered through Newport Coast Securities a SEC registered investment advisory.