What's to Come, What You Need to Know, and What You Need To Do About It

WHATS TO COME AND WHAT YOU NEED TO KNOW

Today's blog, at least the 1st Part, is going to be a philosophical discussion and may be the most important thing you hear or read this year. You need to think carefully about what we are saying and see if it matches up with your perception of what is happening. Dan Cofall and myself have been working out & studying what we believe has the highest likelihood of happening over the next months to a year. Don't panic, there is time to position yourselves properly, and you will be able to take advantage of midterm movements within the larger, long-term cycle, and most importantly, the long-term cycle itself.

Dan Cofall has been working on the "big picture," macroeconomic view, while I have been working on the mechanics of the investment side. What to do, when, how, and why. In a nutshell, the worldwide economies and their rates of growth are slowing. Some are even beginning to turn negative. The governments around the world have printed vast amounts of money and debt.

What does this mean. All the talking heads on TV are talking about the risk of deflation increasing and inflation decreasing. What we believe is most likely coming over the next year, especially if the governments don't stop borrowing and printing immediately, is Hyper-stagflation. Stagflation means fixed, stagnant wages due to lack of pricing power from globalization coupled with the devaluation of the dollar causing rising consumption and borrowing cost. In short, high inflation without a corresponding rise in wages to help offset the high inflation.

Remember the 70s, we had corresponding increases in our wages, so even though if felt like the government and prices were out of control, people actually did pretty well. This will not be the case this time, as your wages will not be rising with costs, and therefore, you will feel poorer.

The "missing link" that most people are missing is the disparity between the 2010 and 2011 US Budget: Actual vs Estimates. The Estimates for the deficit are $1.3 Trillion in 2010 in this "recovery" year and improvements in GDP. The Estimates for 2011 are even "loftier." If these estimates do not occur then the budget gap will widen, the dollar will devalue, and borrowing cost will increase. It is looking more and more each day like this is happening. This can be seen reflected in Gold Prices, which hit an all time high today.

The Federal Reserve will become the Lender of Last Resort. Until this happens, people will feel a little uneasy like the economy has quite turned the corner yet into a full recovery. The economy will feel sluggish and choppy for months. Sound familiar? Some days will be good, others will be bad. High unemployment rates will persist especially after government created, artificial temporary jobs are no longer. If the government

If the government continues with artificial employment, this will further balloon the deficits. Remember, it takes 5-8 private jobs (taxes paid) to pay for the salary of 1 government job. Therefore, as we continue to "create" jobs that are not private sector jobs, we (the US government and taxpayers) are just borrowing to pay the salaries of these workers.

New stimulus plans will add an additional burden. Next January, we, the taxpayer, will revert back to the pre-Bush tax cuts and the economy will experience a dramatic drop in disposable income and REAL stimulus for the economy.

We already have unsustainable debt levels at every level of government. Municipalities and States are bankrupt. The only reason our Federal Government is not bankrupt is they own the printing press. But the more they print, the more they devalue each dollar.

The overall result will be less private sector jobs, more healthcare costs being borne by our government, and state & local government bailouts by the federal government. Thus declining disposable income levels, increasing government debt, and the FED and Treasury without any tools left, all coupled with rising costs.

All these things together will form a vicious cycle. Not to mention, WHEN (not IF) interest rates rise, this will add additional 100s of billions of interest expense onto our deficit each year.

Alan Greenspan, who caused much of this problem, even came out & said today that the US is at her spending limit and we have to stop discretionary spending immediately. I always love someone who comes late to the party and then acts like an expert! At least this Keynesian, spend to stimulate economist is finally getting it.

Any benefits the government does pay will be in devalued dollars, meaning your dollars will buy you less things you need. The government must figure out what and whom to cut. Dan Cofall's blog has more about the political side, whose benefits will be cut, etc. I want to focus on the investment side & what you need to do about it.

WHAT YOU NEED TO DO ABOUT IT

Remember, the dollar and US Treasuries are now going to be risky. Maybe not in the short term, and especially during upheavals like Europe or the Middle East, as there will be a flight to "perceived" quality.

However, once rates start to rise and countries begin to stop buying our debt, our only choice - devalue our currency, monetize the debt, print money - they all mean the same thing. It will make you poorer in real terms or purchasing power.

The Key: Focus on assets not linked directly to the dollar. Only a few countries have been fiscally responsible relatively speaking. The Australian dollar, the Canadian dollar, and the Swiss Franc are currencies to look at. You must be careful and pay attention because Canada is somewhat linked to the US and may have problems. The Australian economy is linked to China, and China is currently facing their own banking & real estate crisis. The Swiss economy is somewhat dependent upon the other European countries and therefore fragile.

Some Gold and Silver are a must for this current environment. Commodities will be another asset class you must have. Therefore, if prices do go up, your portfolio will go up. You must focus on purchasing power and wealth preservation. If everything goes down, & you go down less, you win! Paper assets will be the most at risk.

Going to cash, including non-TIP Treasuries, will be your first instinct. That will be the trap the governments hopes you will go to. You are assured of losing purchasing power is we are having rising prices and inflation. Going to non-US related cash and cash equivalents will be key.

Therefore, your cash portion should consist of only the most solid countries. In addition, you should have gold, silver and commodities including oil. You can also take advantage and make money by shorting Treasuries and shorting the stock markets.

All of this will take place in stages and convulsions, then is will begin to become clearer to the majority, that is when the longer term trend will set in, and the volatile gyrations will cease, and a steady decline will begin. That is when you can have a more stable portfolio, but on the short side, not the long side!

This is all food for thought and just wanted to get you to start thinking of a strategy because all of this will begin before you think.

TODAY'S MARKETS

OK, enough of the macroeconomic cycle to come, lets quickly talk about the markets today.

All 3 major indices ended positive today bouncing around the breakeven line. Thursday's (yesterday) volume was light with choppy price action. The market internals were mixed. Up volume was 34% on the NYSE and 55% on the NASDQ. Advancers beat Decliners by a slight margin on the NASDQ, while the reverse was true for the NYSE.

Volume on the NYSW yesterday was 4.7 Billion shares, down 8% from Wednesday, a negative sign. Today is was 5.35 BN, which is a good sign as volume is picking up. Bottom line, short term conditions point to consolidation or even a short term pullback. But the supply & demand picture for stocks look good. Technically, it would indicate we have established a short term bottom. However, it is the fundamentals I am worried about, not the technicals for the reasons stated above.

This is why it is not a buy and hold market like the 90s or 2003-2007, you will have to be diligent and pay attention.

Now for another stock to look at - Clean Harbors "CLH," - which does environmental cleanup, treatment, and disposal on an emergency response basis. They are one of the big players in the Gulf Spill Cleanup. It has already had a run, but might have some room to go as long as that oil keep coming out of that hole and they don't get it plugged anytime soon. Unfortunately, that is the way it is looking now.Also, a hurricane will spread the need for cleanup over a much wider area.

It has blown through resistance and has strong momentum. This is a stock you need to keep in your arsenal when bad environmental events happen.

Keep studying,
Dan Stewart CFA®