Markets do the strangest things.
Following the S&P downgrade of US debt, investors piled into (guess what) U.S. Treasuries. Despite the downgrade, they are still viewed as the world’s safest investment.
After months of brinksmanship Congress and President Obama agreed to raise the U.S. debt ceiling, avoid a default and reduce the budget deficit over time. Rather than relieved, the stock market dropped over 500 points. People are concerned the spending cuts in the agreement will slow the economy.
Japan has one of the highest debt and weakest economy among developed nations. Yet the yen has strengthened to a record against the dollar.
World economic prospects are grim. We are only 3 years into an estimated 7 year deleveraging cycle.
In the U.S. 25 million people cannot find full time employment. The housing market is still in trouble. China is grappling with inflation. Euroland is in shambles. The Middle East is in flux. (Did I forget global warming, terrorism, and growing food shortages?)
Today’s crisis is arguably more serious than that of 2008.
Three years ago the fear was that the banks would fail. Today the fear is that Governments – Greece, Ireland, Portugal, Spain, Italy, the U.S.- will fail.
In 2008 Governments were there to save the banks. Today who is to save the Governments? The only prescription, short of printing money, is to balance their budgets but this requires raising taxes and cutting spending which politicians are reluctant to do.
Even if austerity measures were to be passed as some European countries have done, these will strangle economies for years and strain the social fiber. The riots in England may be a harbinger of things to come.
Governments have run out of resources and policy tools to stimulate growth. In the U.S. the problem is compounded by a vicious political environment that has paralyzed Washington.
In fact, and it said as much, S&P’s downgrade was not as much a commentary on the U.S.’ financials as it was on its politics. There is serious doubt America is financially governable particularly going into the 2012 elections. The uncertainty is damaging business and consumer confidence further delaying any recovery.
There is some good news: Today companies are trimmer and less indebted than they were 3 years ago. The banking system is sounder (assuming sovereign debts do not default).
With slow growth, oil prices should fall which will help consumers.
Against this backdrop what are investors to do?
On foreign exchange neither the US dollar nor the euro look good in the medium term. The alternatives are either the yen, the Swiss franc, the commodity currencies- Canadian, Aussie, New Zealand dollars and Norwegian kroner- or emerging market (EM) currencies. The first two offer no return. This leaves commodity and some EM currencies (including the Philippine peso) as the best combination of some yield and safety.
Stocks will suffer with anemic growth although some now offer dividend yields that beat bonds.
Commodities should weaken but agri-products should remain firm as populations grow and farmlands shrink. Gold is seen as a safe haven.
Medium term investment grade and selected EM bonds are attractive since interest rates are unlikely to rise until 2013.
Real estate should benefit from the low yield environment although valuations are high. It also suffers from liquidity which is a premium in times of crisis.
Here are 10 thoughts on investing in turbulent times:
1. Diversify the portfolio to spread risk.
2. Do not unduly worry about market prices. If you like your house, don’t fret over what your neighbor’s house is going for.
3. Invest your money, don’t play with it. Buy companies not because they are hot but because they represent long-term value. I personally like stocks whose products I enjoy e.g. Apple and Amazon.
4. Do not chase investments. Like a bus, there will always be another opportunity coming around.
5. Maintain a cushion of cash to exploit opportunities. Falling markets eventually produce value.
6. Remember risks are related to return.
7. Understand markets are about the future. This is the hardest concept to grasp, that prices are about expectations not current results.
8. Markets do not always behave as expected. Think three steps beyond the seemingly obvious.
9. Keep your perspective. Investing is as much a mindset as it is a technical exercise.
10. Count your blessings. Ninety nine percent of people would like to have your problem.
The above guidelines are no assurance of success. What they might provide, however, is peace of mind even as the world comes to an end.